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Title: Financial Accounting
Description: A note that produced by opentuition.com Introduction to Accounting. The Statement of Financial Position and Statement of Profit or Loss. Double Entry Bookkeeping
Description: A note that produced by opentuition.com Introduction to Accounting. The Statement of Financial Position and Statement of Profit or Loss. Double Entry Bookkeeping
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June 2015 Examinations
ACCA F3 / FIA FFA
CONTENTS
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Introduction to Accounting
The Statement of Financial Position and Statement of Profit or Loss
Double Entry Bookkeeping
Accruals and Prepayments
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
Depreciation
The provisions of IAS 16 Property, Plant and Equipment
Irrecoverable Debts and Allowances
Inventory and IAS 2
Books of Prime Entry
Journal Entries
Sales Tax
Accounting for Limited Companies
Statements of Cash Flows
Bank Reconciliations
Control Accounts
Adjustments to Profit and Suspense Accounts
Mark-up and Margins
Accounting Conventions and Policies
IAS 10: Events after the Reporting Period
Intangible Assets: Goodwill, Research and Development
Group Accounts The Consolidated Statement of Financial Position (1)
Group Accounts The Consolidated Statement of Financial Position (2)
Group Accounts The Consolidated Statement of Profit or Loss
Group Accounts – Further Points
Interpretation of Financial Statements
The Regulatory Framework
Business Documentation
Answers to examples
Answers to Multiple Choice Tests
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INTRODUCTION TO ACCOUNTING
1 Introduction
In this chapter we will look at what accounting is and why accounting information is prepared
...
2 Definition of accounting
Accounting comprises the recording of transactions, and the summarising of information
...
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June 2015 Examinations
Introduction to Accounting
ACCA F3 / FIA FFA
Chapter 1
4 Users of accounting information
Users of the financial information for a business will include the following:
•
management
•
owners / shareholders
•
potential investors
•
lenders
•
employees
•
the government
•
the public
The main financial statements that are likely to be available to all users are the Statement of
Financial Position and the Statement of Profit or Loss
...
We will
consider these later
...
A
B
C
D
1 and 2 only
2 and 3 only
1 and 3 only
1, 2 and 3
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(2 marks)
June 2015 Examinations
Chapter 2
ACCA F3 / FIA FFA
5
Free lectures are available on opentuition
...
2 The dual (or double) effect of transactions
Let us consider the effect of the following transactions on a sole trader:
(a) e owner puts $10,000 into a separate bank account for the business:
Th
The business owns
The business owes
(b) The business buys a shop for $2,000
The business owns
The business owes
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6
June 2015 Examinations
ACCA F3 / FIA FFA
The Statement of Financial Position and Statement of Profit or Loss
(c) The business buys goods for resale (in cash) for $1,000
The business owns
The business owes
(d) The business buys more goods for resale (on credit) for $2,000
The business owns
The business owes
(e) The business buys a car for $3,000 (cash)
The business owns
The business owes
(f )
The business sells half of the goods for $2,400 (cash)
The business owns
The business owes
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Chapter 2
June 2015 Examinations
The Statement of Financial Position and Statement of Profit or Loss
(g) The business sells the remainder of the goods for $2,800 on credit
The business owns
The business owes
(h) The business pays $600 of the amount owing, on account
The business owns
The business owes
(i)
The business pays electricity of $200
The business owns
The business owes
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ACCA F3 / FIA FFA
Chapter 2
7
8
June 2015 Examinations
ACCA F3 / FIA FFA
The Statement of Financial Position and Statement of Profit or Loss
(j)
Chapter 2
The business receives half of the amount owing to it, on account
...
The check made on the profit is effectively a Statement of Profit or Loss
...
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June 2015 Examinations
ACCA F3 / FIA FFA
The Statement of Financial Position and Statement of Profit or Loss
3 The Statement of Financial Position
Below is an example of the layout of a Statement of Financial Position for a sole trader:
Statement of Financial Position as at 31 March 2009
$
$
ASSETS
Non-current assets
Land and Buildings
100,000
Plant and Equipment
50,000
Fixtures and Fittings
20,000
Motor Vehicles
30,000
200,000
Current assets
Inventories
10,000
Accounts receivable
12,000
Prepayments
3,000
Cash
4,000
29,000
$ 229,000
CAPITAL AND LIABILITIES
Capital
Capital at 1 April 2008
Profit for year to 31 March 2009
Less: withdrawals
130,000
50,000
(10,000)
170,000
Non-current liabilities
8% Loan
25,000
Current liabilities
Accruals
2,000
Accounts payable
20,000
Bank overdraft
12,000
34,000
$ 229,000
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Chapter 2
9
10
June 2015 Examinations
ACCA F3 / FIA FFA
The Statement of Financial Position and Statement of Profit or Loss
Terminology:
Asset
anything owned by the business
Non-current asset
an asset the business intends to keep (longer than 12 months)
Current asset
not a non-current asset (!)
Inventory
an asset bought by the business intended for sale
Accounts receivable
amount owed to the business by customers
Prepayment
a payment made by the business in advance
Capital
amount owing by the business to the proprietor (owner)
Drawings (or withdrawals)
anything taken from the business by the owner
Liability
amount owing by the business
Current liability
a liability due within 12 months of Statement of Financial Position date
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Chapter 2
June 2015 Examinations
ACCA F3 / FIA FFA
The Statement of Financial Position and Statement of Profit or Loss
Chapter 2
Non-current liability
a liability due more than 12 months from the date of the Statement of Financial Position
Accounts payable
liability due to suppliers
Bank overdraft
liability due to the bank (a “negative” bank balance)
4 The Statement of Profit or Loss
Below is an example of the layout of a Statement of Profit or Loss for a sole trader:
Statement of Profit or Loss for the year ended 31 March 2009
$
Sales revenue
$
180,000
Cost of sales:
Opening Inventory
Purchases
30,000
120,000
150,000
Closing Inventory
(40,000)
110,000
Gross Profit
70,000
Other income:
Rent received
Interest received
10,000
1,000
11,000
81,000
Expenses:
Rent
5,000
Electricity
3,000
Telephone
2,000
Wages and salaries
Motor expenses
15,000
6,000
31,000
$50,000
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11
12
June 2015 Examinations
ACCA F3 / FIA FFA
The Statement of Financial Position and Statement of Profit or Loss
Chapter 2
Terminology
Revenue
Purchases
Trading Account
5 The difference between Capital and Revenue items
You should note from the previous exercises that when we pay for anything, there are two possible
reasons
...
We call the purchase of assets (for the Statement of Financial Position) Capital Expenditure, whereas
the payment of expenses (for the Statement of Profit or Loss) is called Revenue Expenditure
...
Since the
above equation is true at any point in time, it also holds true that over a period of time:
INCREASE IN NET ASSETS = INCREASE IN CAPITAL
There are only three reasons why the capital of a business should change over time:
More capital introduced (this will increase the capital)
•
•
•
Profit for the period (this will increase the capital)
Drawings during the period (this will reduce the capital)
Therefore, finally, over a period of time,
INCREASE IN NET ASSETS = CAPITAL INTRODUCED + PROFIT - DRAWINGS
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June 2015 Examinations
The Statement of Financial Position and Statement of Profit or Loss
ACCA F3 / FIA FFA
Chapter 2
E xample 1
On 1 January, net assets of a business were $25,000
...
During
the year the owner had introduced more capital of $10,000 and had made drawings of $7,000
...
On 31 December, the net assets were $150,000
...
(2 marks)
Q uestion 2
The purpose of a Statement of Financial Position is to show:
A a clear and definite estimate of what a business is really worth
B the amount the business could be sold for in liquidation
C the amount the business could be sold for as a going concern
D the assets of the business and the claims against those assets
(2 marks)
Q uestion 3
A grocery business has net assets of $64,800 at 31 January 2008 and the net profit for the year to 31 January
2008 was $30,600
...
He also withdrew
$960 per month and on 24 December 2007 withdrew goods amounting to $840
...
com
DOUBLE ENTRY BOOKKEEPING
1 Introduction
In the previous chapter we looked at the fact that every transaction has two effects, and also
looked at the layout of the financial statements
...
This is known as bookkeeping, and in this
chapter we will look at the standard way in which bookkeeping is done
...
The ‘account’ used to always be a page in a
book, but these days may be a page in a book, or, more likely, a record on a computer
...
If the account is in a book then when we open the book there are two pages facing us
...
If we make an entry on the debit side, we say that we debit the account
...
For every transaction there will be two entries – one on the debit side of an account and one on
the credit side of another account
...
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16
June 2015 Examinations
ACCA F3 / FIA FFA
Double Entry Bookkeeping
Chapter 3
3 The general rules of double entry
A debit entry represents one of the following:
an increase in an asset
•
•
•
a decrease in a liability
an item of expense
A credit entry represents one of the following:
an increase in a liability
•
•
•
a decrease in an asset
an item of income
4 Worked example
We will work through the following entries together (use big t-accounts, because we will do other
things later with the same accounts):
E xample 1
The following are the transactions of Kristine’s business during her first month of trading
...
(a)
(b)
(c)
(d)
(e)
(f )
(g)
(h)
(i)
(j)
Kristine starts a business and pays in $5,000 as capital
The business buys a car for $1,000 cash
They buy goods for resale for $500 cash
They buy more goods for resale for $600 on credit from Mr A
They pay rent of $200 cash
They sell half the goods for $800 cash
They sell the remaining goods on credit for $900 to Mrs X
They pay $400 cash on account of the amount owing to Mr A
They receive $500 from Mrs X
Kristine withdraws $100 cash from the business
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June 2015 Examinations
Double Entry Bookkeeping
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ACCA F3 / FIA FFA
Chapter 3
17
18
June 2015 Examinations
ACCA F3 / FIA FFA
Double Entry Bookkeeping
Chapter 3
5 Balancing the accounts
In the previous example we have now recorded all the entries
...
With such a small example, the balances may be obvious
...
The rules for balancing are:
(a) draw total lines on both sides of the t-account
(b) add up the bigger of the two sides and put this total on both sides of the account
(c) fill in the missing figure on the smaller of the two sides – this figure is the balance on the account
(d) carry forward this balance by also writing it on the opposite side of the account, below the total
lines
...
E xample 2
Go back to the previous example and balance off the accounts
...
For instance, when recording the transactions we could have accidentally debited and
credited with different figures
...
This is known as a transposition error
...
The check is to list the balances on every account
...
We call this list the Trial Balance
...
Note also although there must be errors if the trial balance does not balance (and we would have
to check everything to find the errors), there can be errors that will not be found by preparing a
trial balance
...
We do this by examining each account in turn and ‘closing off ’
...
They exist at the end of the period, and still exist at the beginning
of the next period
...
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June 2015 Examinations
Double Entry Bookkeeping
ACCA F3 / FIA FFA
Chapter 3
Statement of Profit or Loss items:
These are total income or expense for the period
...
We do this by opening a new account in the nominal ledger called Statement of Profit or Loss
...
8 Preparation of the Financial Statements
Having closed off all of the t-accounts, the balance remaining on the Statement of Profit or Loss
account is the profit (or loss) for the period
...
The balances remaining on the accounts all represent Statement of Financial Position items
...
Note that this preparation of the Statement of Financial Position and Statement of Profit or Loss
does not result in any additional entries in the t-accounts
...
Although the financial statements are now finished, the amount owing to the owner at the end
of the period is split between three accounts in the nominal ledger – the Capital Account, the
Drawings Account, and the Statement of Profit or Loss Account
...
We achieve this by making the following two entries:
(a) Debit Statement of Profit or Loss t-account, and
Credit Capital Account
with the balance on the Statement of Profit or Loss account
...
E xample 6
Go back to the original t-accounts and finish them by tidying up the owner’s accounts
...
com
June 2015 Examinations
Chapter 4
ACCA F3 / FIA FFA
25
Free lectures are available on opentuition
...
However, there are four types of adjustments that the accountant will normally have to make
when preparing the financial statements to deal with items that will not have been recorded on a
day by day basis by the bookkeeper
...
We will deal with these adjustments separately – accruals and prepayments in this chapter, and
the others in the subsequent chapters
...
For example, it is normal to pay car insurance for a whole
year at the beginning of the year
...
The other half of the payment
would be paid in advance, and in theory – were we to close down – would be repayable to the
company
...
For this reason we do not show the amount of the overpayment as an account receivable, but show it separately in the Statement of Financial Position as
a prepayment
...
However, if again we had
paid for a year but only used half a year so far, then it would be wrong to show the full payment as
an expense in the Statement of Profit or Loss
...
At the end
of this chapter we will summarise all the entries needed
...
During the year to 31 December 2000, she made the following payments for insurance:
5 January 2000
$800
for the 6 months to 30 June 2000
15 June 2000
$2,000
for the 12 months to 30 June 2001
(a) Show extracts from the Statement of Profit or Loss and Statement of Financial Position
(b) Write up the t-account for Insurance for the year to 31 December 2000
(c) Close off the t-account
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June 2015 Examinations
Accruals and Prepayments
ACCA F3 / FIA FFA
Chapter 4
3 Accruals
An accrued expense (or accrual) is the name we give to an amount owing for which we have not
received an invoice
...
If our accounting year end occurs at the end of July, then
we will owe for the electricity used in July, even though we will not receive an invoice until after
the end of September
...
Again, we will illustrate the entries by an example and summarise the rules at the end of the
chapter
...
He had
however not received a bill from the telephone company
...
(b) Write up the t-account for Telephone for the year to 31 March 2001
(c) Close off the account
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27
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June 2015 Examinations
ACCA F3 / FIA FFA
Accruals and Prepayments
Chapter 4
4 Subsequent accounting periods
In both of the two previous examples, we were dealing with the first year of trading
...
As a result, we would start the next accounting period with a balance brought forward, and we should
therefore consider what entries are needed in the second period
...
Firstly Karen:
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June 2015 Examinations
Accruals and Prepayments
ACCA F3 / FIA FFA
Chapter 4
E xample 3
During the year to 31 December 2001, Karen made the following payment in respect of insurance:
12 June 2001
$2,400 for the 12 months to 30 June 2002
(a) Write up the t-accounts for Insurance and for Prepayments for the year to 31 December 2001
(b) Close off the accounts
(c) Show extracts from the Statement of Profit or Loss and Statement of Financial Position
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June 2015 Examinations
ACCA F3 / FIA FFA
Accruals and Prepayments
Chapter 4
Now Amit,
E xample 4
During the year to 31 March 2002 he made the following payments in respect of telephone:
12 April 2001
$950 for the 3 months to 31 March 2001
15 July 2001
$1,000 for the 3 months to 30 June 2001
24 October 2001
$1,200 for the 3 months to 30 September 2001
12 January 2002
$1,350 for the 3 months to 31 December 2001
As at 31 March 2002, Amit estimated that $1,500 was owing for the 3 months to 31 March
...
You are required to:
(a) write up the t-accounts for Telephone and for Accruals for the year to 31 March 2002
(b) close off the accounts
(c) show extracts from the Statement of Profit or Loss and Statement of Financial Position
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June 2015 Examinations
Accruals and Prepayments
ACCA F3 / FIA FFA
Chapter 4
5 Summary of entries
(a) Prepayments
(1) Reverse any Prepayments brought forward:
DR Expense Account (e
...
Insurance, Rates)
CR
Prepayments Account
(2) Enter any payments during the period:
DR Expense Account
CR Account
Cash
(3) Enter any prepayments at the end of the period:
DR Prepayments Account
CR
Expense Account
(4) Close-off the accounts:
Transfer the balance on the expense account to the Statement of Profit or Loss
...
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31
32
June 2015 Examinations
ACCA F3 / FIA FFA
Accruals and Prepayments
Chapter 4
(b) Accruals
(1) Reverse any accruals brought forward:
DR Accruals Account
CR Expense Account (e
...
Telephone, Electricity)
(2) Enter any payments during the period:
DR Expense Account
CR Account
Cash
(3) Enter any accruals at the end of the period:
DR Expense Account
CR
Accruals Account
(4) Close-off the accounts:
Transfer the balance on the expense account to the Statement of Profit or Loss
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Accruals and Prepayments
Chapter 4
Test
Q uestion 1
At 31 December 2008 the following require inclusion in a company’s financial statements:
(1) On 1 January 2008 the company made a loan of $28,800 to an employee, repayable on 1 January 2009,
charging interest at 2 per cent per year
...
(2) The company has paid insurance $21,600 in 2008, covering the year ending 31August 2009
...
For these items, what total figures should be included in the company’s Statement of Financial Position at 31 December 2008?
A
B
C
D
Current assets
$
24,000
53,376
24,576
38,976
Current liabilities
$
29,376
nil
nil
14,400
(2 marks)
Q uestion 2
Moira prepares its financial statements for the year to 30 April each year
...
The annual rent was
$201,600 per year until 30 June 2008
...
What rent expense and end of year prepayment should be included in the financial statements for the
year ended 30 April 2009?
Expense Prepayment
A $223,200
$19,200
B $223,200
$38,400
C $225,600
$9,200
D $225,600
$38,400
(2 marks)
Q uestion 3
A company receives rent from a large number of properties
...
The following were the amounts of rent in advance and in arrears at 30 April 2007 and 2008:
30 April 2007
$
Rent received in advance
68,880
Rent in arrears (all subsequently received)
50,880
30 April 2008
$
74,880
44,160
What amount of rental income should appear in the company’s Statement of Profit or Loss for the
year ended 30 April 2008?
A $1,167,600
B $1,106,160
C $1,203,600
D $1,142,160
(2 marks)
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June 2015 Examinations
ACCA F3 / FIA FFA
Accruals and Prepayments
Chapter 4
Q uestion 4
A business has received telephone bills as follows:
Date received
Quarter to 30 November
Quarter to 28 February
Quarter to 31 May
Quarter to 31 August
Quarter to 30 November
Quarter to 28 February
2005
2006
2006
2006
2006
2007
December
March
June
September
December
March
2005
2006
2006
2006
2006
2007
Amount
of bill ($)
739
...
00
898
...
80
840
...
00
Date paid
January
April
June
October
January
March
2006
2006
2006
2006
2007
2007
In the Statement of Profit or Loss for the year ended 31 December 2006 the charge for telephone
should be
A $3,250
...
60
C $3,407
...
60
(2 marks)
Q uestion 5
Details of a company’s insurance policy are shown below:
Premium for year ended 31 March 2008 paid April 2007
Premium for year ending 31 March 2009 paid April 2008
$25,920
$28,800
What figures should be included in the company’s financial statements for the year ended 30 June 2008?
Statement of Profit or
Statement of Financial Position
Loss
$
$
A
26,640
21,600 prepayment (Dr)
B
28,080
21,600 prepayment (Dr)
C
26,640
21,600 accrual (Cr)
D
28,080
21,600 accrual (Cr)
(2 marks)
Q uestion 6
A company owns a number of properties which are rented to tenants
...
All rent in arrears was subsequently received
...
com
IAS 37 – PROVISIONS, CONTINGENT
LIABILITIES AND CONTINGENT ASSETS
A contingent liability is a liability that may result, but depends (or is contingent) on the outcome
of uncertain events
...
If they lose the case then they may have to pay a fine
...
The question is as to whether or not we show the potential liability in the
accounts
...
The requirements of IAS 37:
Contingent liabilities
Contingent assets
Virtually certain ( > 95% )
Provide
Recognise
Probable ( 50% to 95%)
Provide
Disclose by note
Possible ( 5% to 50% )
Disclose by note
No disclosure
Remote ( < 5% )
No disclosure
No disclosure
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June 2015 Examinations
ACCA F3 / FIA FFA
IAS 37 – Provisions, Contingent Liabilities and Contingent Assets
Chapter 5
Test
Q uestion 1
How should a contingent liability be included in a company’s financial statements if the likelihood of a transfer
of economic benefits to settle it is remote?
A
B
Disclosed by note with no provision being made
No disclosure or provision is required
(2 marks)
Q uestion 2
The following items have to be considered in finalising the financial statements of Q, a limited liability company:
(1) The company gives warranties on its products
...
(2) e company has guaranteed the overdraft of another company
...
What is the correct action to be taken in the financial statements for these items?
Create a Disclose by
No action
provision note only
A
1
2
B
1
2
C
1, 2
D
1, 2
(2 marks)
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June 2015 Examinations
Chapter 6
ACCA F3 / FIA FFA
37
Free lectures are available on opentuition
...
We will also look at the
different methods of calculating depreciation of which you need to be aware, and the accounting
entries
...
A tangible non-current asset is one that can be touched and refers to such items as plant, buildings
and motor vehicles
...
3 Depreciation
Depreciation is the charging of the cost of a non-current asset over its useful life
...
However, if the car is expected to last 5 years, it would be misleading to have one expense
in the Statement of Profit or Loss of $10,000 every 5 years and nothing in the other years
...
The charge of $2,000 in the Statement of Profit or Loss each year is known as depreciation
...
The way in which $2,000 was calculated in the above illustration is known as the straight-line
method of depreciation
...
The purpose of depreciation is not to place a true value on the asset in the Statement of Financial
Position
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Depreciation
Chapter 6
4 Methods of calculating depreciation
There are several methods of calculating depreciation
...
Straight line method
Under this approach we charge an equal amount of depreciation each year
...
On 1 April 2002 he purchases a car for $12,000
...
You are required to calculate the depreciation charge for each of the first three accounting periods, and
to show extracts from the Statement of Financial Position and Statement of Profit or Loss for each of
the three accounting periods
...
A very common alternative in practice is to charge a
full year in the year of purchase, regardless of when in the year it was actually purchased
...
If you are told to charge a full year in the year of purchase
then do so
...
)
Reducing balance method
Under this approach we charge more depreciation in the early years of an asset’s life, with a
progressively lower charge in each subsequent year
...
E xample 2
Zils has a year end of 31 December each year
...
His depreciation policy is to charge 20% reducing balance, with a full years charge in the year of purchase
...
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39
40
June 2015 Examinations
ACCA F3 / FIA FFA
Depreciation
Chapter 6
5 Accounting for depreciation
Whichever method is used, the accounting entries are the same
...
E xample 3
Melns has a year end of 30 June each year
...
The car has an expected life of 5 years, with an estimated scrap value of $1,000
...
Show the accounting entries for the first three accounting periods
...
The balance on the Accumulated Depreciation account will appear in the Statement of Financial
Position as a deduction from the cost of the asset
...
It is also
extremely unlikely that any sale proceeds will exactly equal the value of the asset as shown in the
financial statements
...
This difference (which is really the effective over or
under charge of depreciation) is called the profit or loss on sale and is shown in the Statement of
Profit or Loss
...
Write up the ledger accounts for his fourth accounting period and show extracts from his Statement of
Financial Position and Statement of Profit or Loss
...
Very often you will be told that the depreciation policy is to charge no depreciation in
the year of sale
...
Summary of the accounting entries for the sale of a non-current asset:
DR Disposal Account
CR Asset Account
with the cost of the asset sold
DR Accumulated Depreciation Account
CR Disposal Account
with the accumulated depreciation on the asset sold
DR Cash
CR Disposal Account
with the proceeds of sale
The balance remaining on the Disposal Account is the profit or loss on sale
...
7 Revaluation of non-current assets
During a period of high-inflation, the value of non-current assets may be well in excess of their
net book value
...
Any profit resulting from such revaluation is an unrealised profit (in that the asset has not been
sold and therefore no real profit has actually been made)
...
(For a limited company this must be
the case
...
)
IAS 16 Property, Plant and Equipment requires that when an item of property, plant or equipment
is revalued, then the entire class of property, plant and equipment to which the asset belongs must
be revalued
...
The depreciation charge will be higher than it was before the revaluation, and then excess of the
new charge over the old charge should be transferred from the revaluation reserve to accumulated
profits
...
In his Statement of Financial Position as at 31 December 2002 he has buildings at a cost of $3,600,000 and
accumulated depreciation of $1,080,000
...
On 30 June 2003, the building is to be revalued at $3,072,000
...
Show the relevant ledger accounts for the year to 31 December 2003
...
What should be the depreciation charge for the year ended 31 December 2008?
A $68,000
B $64,000
C $61,000
D $55,000
(2 marks)
Q uestion 2
What is the correct double entry to record the depreciation charge for a period?
A DR Depreciation expense
CR
Accumulated depreciation
B DR Accumulated depreciation
CR
Depreciation expense
(2 marks)
Q uestion 3
A company’s motor vehicles at cost account at 30 June 2007 is as follows:
Motor vehicles – cost
Balance b/f
Additions
$
85,920 Disposal
31,080 Balance c/f
117,000
$
28,800
88,200
117,000
What opening balance should be included in the following period’s trial balance for motor vehicles –
cost at 1 July 2007?
A $88,200 DR
B $117,000 DR
C $88,200 CR
D $117,000 CR
(2 marks)
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45
46
June 2015 Examinations
ACCA F3 / FIA FFA
Depreciation
Chapter 6
Q uestion 4
On 1 January 2000 Krin Co
...
It was estimated that the machine’s useful life
would be 7 years and its residual value $7,000
...
What is the profit on disposal?
A
$2,000
B
$8,000
C
$12,000
D
$20,000
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(2 marks)
June 2015 Examinations
Chapter 7
ACCA F3 / FIA FFA
Free lectures are available on opentuition
...
Land normally has an unlimited
life and therefore does not require depreciation
...
Any downward revaluation
should be charged as an expense in the Statement of Profit or Loss
...
2 Disclosure requirements
The following should be disclosed in the financial statements:
(a) the methods of depreciation used
(b) the total cost of each asset heading, and the related accumulated depreciation, at the beginning
and end of the period
...
(We will look at examples of the layout in the later chapter on limited companies financial
statements
...
com
IRRECOVERABLE DEBTS AND ALLOWANCES
1 Introduction
In this chapter we will consider what a company should do in the situation where an accounts
receivable does not pay his debt, or where there is some doubt about the eventual payment of all
or part of the debt
...
2 Definitions
An irrecoverable debt is where we are reasonably certain that the receivable is not going to pay
...
A doubtful debt is where we are worried that the receivable might not pay
...
(Note that obviously if a customer refuses to pay we are at liberty to take them to court
...
)
3 Treatment in the financial statements
It is important that we do not overstate assets in the Statement of Financial Position (that we
apply the prudence concept) and that therefore we should only show the receivables that we feel
confident will pay
...
As a result the treatment is as follows:
Irrecoverable debts:
These are removed completely, and will no longer appear as part of accounts receivable
...
Specific allowance for receivables:
This is an allowance for particular (or specific) debts, where we know that there is a problem (for
example, the debt has been owing for a long time)
...
However, it may be that at the year-end all of the individual debts are
reasonably recent and we have no way of identifying which particular customers will end up not
paying
...
Again, to be prudent, we will
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50
June 2015 Examinations
ACCA F3 / FIA FFA
Irrecoverable Debts and Allowances
Chapter 8
deduct 5% from receivables to leave only the amount we are reasonably certain of
...
In all cases, the cost of removing irrecoverable debts and of allowing for doubtful debts is charged
as an expense in the Statement of Profit or Loss
...
On investigation, this amount is found to include two debts from A plc and B plc which are to be regarded as
irrecoverable
...
In addition there is $2,800 owing from Z plc which is regarded as doubtful
...
Show extracts from the Statement of Financial Position and Statement of Profit or Loss of Street
...
The problem in examinations results from
the fact that there can be many accounting entries required in a question and it is easy to get lost!
We will illustrate the necessary entries using two worked examples
...
As at 31 December 2000, the balance on her Receivables Account
was $82,000
...
(a) Write up the Accounts Receivable, Irrecoverable debts Expense, and Allowance for Receivables
accounts
(b) Show extracts from Cilla’s Statement of Financial Position and Statement of Profit or Loss
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51
52
June 2015 Examinations
ACCA F3 / FIA FFA
Irrecoverable Debts and Allowances
Chapter 8
To be able to illustrate all of the possible entries, we now need to look at the position in the
following year
...
These amounts had been entered into the Receivables Account, and a balance extracted
...
At 30 June 2008 trade receivables totalled
$1,240,800
...
What figure should appear in the Statement of Profit or Loss for the year ended 30 June 2008 for
these items?
A $146,400
B $52,800
C $57,600
D $57,240
(2 marks)
Q uestion 2
At 31 December 2005 the ledger of X Co
...
During the year ended
31 December 2006 irrecoverable debts of $2,040 were written off
...
The total charge for irrecoverable debts and change in allowance for receivables in the 2006 Statement
of Profit or Loss is
A $98
...
20
C $3,904
...
20
(2 marks)
Q uestion 3
Yv Co’s trial balance shows a receivables’ account balance of $50,000, this includes the following:
(1) $2,500 from Mike who has gone into liquidation
(2) debts of $500 + $1,500 which are to be specially allowed for
(3) cash received from Ken of $1,800 which had previously been written off
(4) cash received from John of $2,900 which had previously been allowed for
What is the revised receivables figure?
A $52,200
B $50,200
C $49,300
D $45,500
(2 marks)
Q uestion 4
At 1 July 2007 a company’s allowance for receivables was $48,000
...
It was decided to write off $72,000 of these debts
and adjust the allowance for receivables to $60,000
...
com
INVENTORY AND IAS 2
1 Introduction
In this chapter we will look at the adjustment for inventory
...
This will be explained within
the chapter
...
2 The accounting entries
You will recall that whenever we buy goods for resale we debit a purchases account, and that
whenever we sell goods we credit a sales account
...
No entries have been made to an inventory account as part of the day to day bookkeeping, and
this will remain the case
...
We will explain the necessary entries by way of three very short examples
...
E xample 1
In year 1 (the first year of trading), a business had purchases of $20,000 and sales of $30,000
...
(a) Show the trading account of the business for year 1, in a form suitable for presentation to the
owners, and
(b) Write up the accounts for purchases and sales, and close them off at the end of the year
...
There was inventory at the end
of the period of $4,000
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Inventory and IAS 2
Chapter 9
E xample 3
In year 3, the business had purchases of $38,000 and made sales of $50,000
...
(a) Show the trading account of the business for year 3, in a form suitable for presentation to the
owners, and
(b) Write up the accounts for purchases, sales, and inventory, and close them off at the end of the year
...
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57
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June 2015 Examinations
ACCA F3 / FIA FFA
Inventory and IAS 2
Chapter 9
3 The valuation of inventory
The figure for the closing inventory in the above examples would have come from physically
counting the inventory
...
)
The basic rule for valuation is:
Inventory should be valued at the lower of cost and net realisable value
...
Net realisable value is the selling price less any extra costs that there will be in order to get the
goods in a state to be sold
...
However, there can be occasions (such as damaged, or obsolete items) when the net
realisable value is the lower
...
E xample 4
A company has closing inventory as follows:
Cost p
...
Estimated further costs
Item
Units
to date
to be incurred p
...
A
100
10
3
B
200
12
5
C
150
6
4
Estimated final selling
price p
...
15
16
11
You are required to calculate the total value of inventory at the end of the period
...
e
...
However, the cost of an item may not be as obvious as might be seemed
...
During the year we have bought 10,000 lamps and at the end
of the year we have 1,000 left in inventory
...
Are
the ones that we have left in inventory old ones (that therefore cost $1 each) or new ones (that
therefore cost $5 each)?
Unless the cost is actually marked on each lamp, the only way in which we can establish a cost it
to have a policy of valuation
...
g
...
(b) FIFO: first-in-first-out
With this approach we value inventory on the basis that every time we sold items during the
year we were selling the oldest ones first
(c) Average cost
Under this approach we value the inventory remaining after each sale at the average cost of
the inventory prior to the sale
...
We will explain the other two approaches
by means of an example
...
During November the following purchases took place:
Units purCost per
Date
chased
unit
10 November
400
$12
...
FIFO:
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June 2015 Examinations
Inventory and IAS 2
ACCA F3 / FIA FFA
Chapter 9
Average cost
5 The provisions of IAS 2: Inventories
The following are the main provisions of the accounting standard:
(a) Inventories should always be valued at the lower of cost and net realisable value
(b) The cost of inventories should include all costs of purchase, costs of conversion, and other costs
incurred in bringing the inventories to their present location and condition
...
e
...
However, if this
is not possible, then the benchmark treatments are FIFO and average cost
...
The inventory account does not keep a day to day record of
inventory
...
When this happens, then a record
is kept of each movement of inventory
...
Also, the
valuation rules will remain – for example, any damaged inventory might need to be valued lower
...
The normal selling price of the
goods is $3,840
...
At 1 May 2007 the company had
700 engines in inventory, valued at $190 each
...
(2) nventories of finished goods may be valued at labour and materials cost only, without including
I
overheads
...
(4) It may be acceptable for inventories to be valued at selling price less estimated profit margin
...
com
BOOKS OF PRIME ENTRY
1 Introduction
We have now covered all of the day-to-day bookkeeping (and also the four types of adjustment
required for preparation of the financial statements)
...
In practice we make the process more efficient by listing each transaction in one of several books
(known as the books of prime entry) and only make the double entries in the nominal ledger at the
end of each month using the totals from the books of prime entry
...
(They are also called Books of First or Original Entry)
...
At the end of each month we will take the totals from these books and perform the double entry
in the nominal ledger accounts
...
It will usually be split into two books – one for receipts and one for payments
...
The Journal
This will be used to record any other, less common, transactions that are not covered by the other
books
...
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66
June 2015 Examinations
Books of Prime Entry
ACCA F3 / FIA FFA
Chapter 10
3 The Receivables and Payables Ledgers
You will remember that in the Nominal Ledger we have a Receivables Account and a Payables
Account
...
However, they do not show the amounts owing from or to each individual customer
or supplier
...
However, we obviously need a day by day record for each individual customer and each
individual supplier, in order to be able to chase customers and to know how much to pay each
supplier
...
There
will be an account for each customer and an entry will be made every time we make a sale or
receive cash
...
It is extremely important to note that the Receivables Ledger is not normally part of the double
entry system of the business, but it simply a memorandum (or note) record of the amount owing
to us by each individual
...
4 A comprehensive illustration
Pattie started business on 1 January 2008 as a trader in chairs
...
S
(b) The business bought chairs for $1,600 cash
...
(d) The business bought a van for $2,500 cash
(e) The business bought more chairs for $400, on credit from Chris
...
(i)
The business sold some chairs for $350, on credit to Edwina
(j)
The business sold some chairs on credit for $700 to Andrew
(k) Rent for the month was paid of $300
(l)
Paid three quarters of the amount due to Chris
(m) Received $1,000 from Ann in respect of the amount owing by her
(n) Pattie paid another $4,000 of her own money into the business bank account
(o) hairs were purchased on credit from William for $1,000, and on credit from Bertha for $1,600
C
(p) Chairs were sold for $1,350 on credit to Tony
(q) Chairs were sold to George for $2,100 on credit
(r)
The business paid wages of $400 to the shop assistant
(s)
Pattie withdrew $700 cash from the business bank account, for herself
...
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67
68
June 2015 Examinations
Books of Prime Entry
ACCA F3 / FIA FFA
Chapter 10
5 A diagram of the complete bookkeeping system
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June 2015 Examinations
Books of Prime Entry
ACCA F3 / FIA FFA
Chapter 10
6 The petty cash book
In the above example, there was no petty cash
...
However, in practice there will be two records kept of cash – the cash receipts and cash payments
books will record cash in and out of the bank, whereas the petty cash book will record cash in and
out of the petty cash box (the loose cash)
...
It is also often the only book of prime entry that is
actually part of the double entry bookkeeping i
...
we will actually debit the petty cash book with
receipts
...
If this is not controlled properly, there is a danger
of theft by an employee
...
g
...
As a result the balance is always
‘topped up’ to the same fixed amount, which fixes an upper limit on the amount that could ever
be stolen
...
B The exact amount of expenditure is reimbursed at intervals to maintain a fixed float
...
D Regular equal amounts of cash are transferred into petty cash at intervals
...
Is this statement true or false?
A True
B False
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(2 marks)
June 2015 Examinations
Chapter 11
ACCA F3 / FIA FFA
71
Free lectures are available on opentuition
...
A journal entry is an entry in this book
...
In this chapter we will explain how journal entries are written in the examination
...
(b) write below the entry a brief description of why the entry is to be made
...
E xample 1
The business purchases goods for resale from Mike for $2,500 on credit
...
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72
June 2015 Examinations
Journal Entries
ACCA F3 / FIA FFA
Chapter 11
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June 2015 Examinations
Chapter 12
ACCA F3 / FIA FFA
73
Free lectures are available on opentuition
...
g
...
We will also explain how to calculate the sales tax on transactions, and the effect on the accounting
entries
...
They are acting as tax collectors for the state, and the tax that they have
charged on their sales is payable to the state periodically (in some countries it is accounted for
monthly and in some countries three-monthly)
...
However, the business will have suffered (i
...
will have been charged) sales tax on their purchases
...
At the end of each period, the excess of the output tax collected by the company over the input tax
suffered by the company is payable to the state
...
Illustration:
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74
June 2015 Examinations
Sales Tax
ACCA F3 / FIA FFA
Chapter 12
3 The calculation of sales tax
The rate of sales tax is determined by the state and differs from country to country
...
Some businesses quote their selling price without sales tax, and then add the relevant percentage
...
It is important in the examination to be able to identify the net sales price, the gross sales price,
and the amount of sales tax
...
The rate of sales tax is 16%
...
The rate of sales tax is 16%
...
The rate of sales tax is 17
...
What is the net (or tax exclusive) selling price, and what is the amount of the sales tax?
4 The accounting entries
Input tax
When a company makes purchases, the amount charged will include sales tax, but the tax suffered
will be recovered from the state
...
The entry is therefore:
Dr Receivables / Cash (with the gross amount)
Cr
Sales (with the net amount)
Cr
Sales tax (with the amount of the tax)
The balance on the Sales Tax account will represent the amount of sales tax owing to or from the
state
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Sales Tax
Chapter 12
Test
Q uestion 1
Jim sells goods on credit to John
...
John bought goods with a list price of $480,000 from Jim
...
5%
...
The invoice for the computer
showed the following costs related to the purchase:
Computer
Additional memory
Delivery
Installation
Maintenance (1 year)
Sales tax (17
...
8
2,932
...
8
B $2,496
C $2,136
D $2,436
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(2 marks)
77
78
June 2015 Examinations
ACCA F3 / FIA FFA
Chapter 12
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June 2015 Examinations
Chapter 13
ACCA F3 / FIA FFA
79
Free lectures are available on opentuition
...
In this chapter we will consider limited
companies
...
g
...
Each share has a nominal value
...
However, this is not
necessarily the amount of capital that was paid in – simply the minimum price at which shares
may be issued
...
The amount of the dividend will often be expressed in relation to the nominal value
...
The dividend will be 10% of $1 – i
...
10c
...
The market value is the amount at
which shares may be traded between shareholders and shareholders will hope that this will rise
over time
...
4 Types of shares
The share capital may be of two types – ordinary shares and preference shares
...
The amount of the dividend will be recommended by the directors, but will be voted on by the
shareholders, and will vary according to the level of profits made by the company
...
Dividends are not an expense of the company, but an appropriation of the profit (equivalent to
drawings for a sole trader)
...
Preference Shares
Preference shares carry a fixed rate of dividend, and this dividend must be paid before any ordinary
dividend
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Accounting for Limited Companies
Chapter 13
5 Issue of shares
The company can issue shares at any price it wants, provided that it is not less than the nominal
value (the amount printed on the shares and stated in the statutes of the company)
...
The total raised is effectively the capital, but it is shown as two separate items on the Statement of
Financial Position – share capital (the nominal amount) and share premium (the excess)
...
20 each
...
Rights issues and public issues
There are two main ways in which a company can raise more capital from shareholders
...
The offer must be to all existing shareholders in the same ratio
...
20 per share
...
Show what will appear on the Statement of Financial Position under the heading ‘equity’ after the
rights issue (assuming that all of the rights are taken up)
...
He can however sell
the rights to others and they are then entitled to buy the shares
...
The issue is normally advertised in the
newspapers and anybody can apply to buy shares
...
In order to be able to have a public issue, the company must have the permission of existing
shareholders and must also become a plc (or public limited company) which normally carries with
it more legal requirements
...
The share premium is one example of a reserve – it is owed to the shareholders, but is classified
on the Statement of Financial Position separately from the share capital
...
With a sole trader, the capital
keeps increasing with any profits made and reducing due to any drawings
...
Again, this is an example of a reserve in that it is money owed to the shareholders, but is separate
from the share capital
...
This is because it is a profit that has not been realised
...
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June 2015 Examinations
Accounting for Limited Companies
ACCA F3 / FIA FFA
Chapter 13
Plant replacement reserve
This is not a legal requirement, but is quite common
...
Even if
the company is not expanding, the assets will need replacing in time and again, the company will
need to retain some profits in order to finance it
...
This is still money owed to the
shareholders and is shown as part of the total equity, but showing it as a separate item makes the
reason more clear to the shareholders
...
It is a rule that a company may only distribute to shareholders (as dividend) any realised profits
that have been made
...
They may only be paid to shareholders if the company closes down, and only then
provided that all liabilities have been paid off in full
...
The two examples of
which you must be aware are Share Premium account and Revaluation account
...
Examples of which you
should be aware are Retained Earnings and Plant Replacement Reserve
...
If
the rule did not exist then it would be possible to create fictitious profits by, for example, revaluing
assets
...
7 Bonus issue of shares
A bonus issue of shares (or a scrip issue, or capitalisation issue) is an issue of free shares to
existing shareholders, in proportion to their existing shareholdings
...
No cash or other consideration is passed from the shareholders to the company
...
However, capital reserves will be used in
preference to revenue reserves
...
8 Types of debt
A company may have long term debt borrowings, just as a sole trader
...
Debt is issued in a similar way to share capital, and the lenders will receive a certificate
...
The treatment in the Statement of Financial Position is no different from that for a sole trader
– it is shown under the heading ‘non-current liabilities’
...
g
...
In each case the quoted % refers to the rate of interest that
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83
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June 2015 Examinations
Accounting for Limited Companies
ACCA F3 / FIA FFA
Chapter 13
has been promised
...
(A sole trader will pay tax,
but as an individual on all his income
...
As a result, there will normally be a tax expense in the Statement of Profit or Loss of a company
...
You cannot be expected to calculate tax in this examination
...
There are however a
few important differences:
(a) the capital will be shown differently in the Statement of Financial Position
(b) the company will prepare two Statements of Profit or Loss, one for internal management use
which is exactly the same as for a sole trader, but also a summarised version
...
(c) the financial statements will also include a ‘Statement of Changes in Equity’ in order to inform
shareholders as to why the equity balances have changed over the year
...
We will deal with this in a separate chapter
(Note also, that in practice the financial statements will always show last years figures also (or
comparative figures)
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Accounting for Limited Companies
Chapter 13
Statement of Financial Position as at 31 December 2008
ASSETS
Non-current assets
Property, plant and equipment
Goodwill
Current assets
Inventories
Trade receivables
Prepayments
Cash
$
100,000
20,000
5,000
8,000
500
1,500
Total assets
EQUITY AND LIABILITIES
Capital and reserves
Share capital
Capital reserves
Retained earnings
50,000
15,000
42,000
Non-current liabilities
10% Loan Notes
20,000
Current liabilities
Trade and other payables
Short term borrowings
6,000
2,000
Total equity and liabilities
$
120,000
15,000
135,000
107,000
20,000
8,000
135,000
Statement of Profit or Loss for year ended at 31 December 2008
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administrative expenses
Finance costs (Interest)
Profit before tax
Income Tax expense
Profit for the year
$
100,000
(40,000)
60,000
2,000
62,000
(26,000)
(9,000)
27,000
(2,000)
25,000
(5,000)
20,000
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85
86
June 2015 Examinations
ACCA F3 / FIA FFA
Accounting for Limited Companies
Statement of Changes in Equity
Balance b/f
Share
capital
$
40,000
Chapter 13
Share premium
$
-
Surplus on revaluation
Revaluation
reserve
$
-
Retained
Earnings
$
27,000
5,000
Total
$
67,000
5,000
Net profit for the period
20,000
20,000
Dividends paid
(5,000)
(5,000)
Issue of share capital
10,000
10,000
Balance c/f
50,000
10,000
20,000
5,000
42,000
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107,000
June 2015 Examinations
ACCA F3 / FIA FFA
Accounting for Limited Companies
Chapter 13
Test
Q uestion 1
Should dividends paid appear on the face of a company’s Statement of Profit or Loss?
A Yes
B No
(2 marks)
Q uestion 2
At 31 December 2004 a company’s capital structure was as follows:
Ordinary share capital
(500,000 shares of 25c each)
Share premium account
$
125,000
100,000
In the year ended 31 December 2005 the company made a rights issue of 1 share for every 2 held at $1 per
share and this was taken up in full
...
What was the company’s capital structure at 31 December 2005?
A
B
C
D
Ordinary share capital
$
450,000
225,000
225,000
212,500
Share premium account
$
125,000
250,000
325,000
262,500
(2 marks)
Q uestion 3
Which of the following should appear as items in a company’s statement of changes in equity?
(1) Profit for the financial year
(2) Income from investments
(3) Gain on revaluation of non-current assets
(4) Dividends paid
A
B
C
D
1, 3 and 4
1 and 4 only
2 and 3 only
1, 2 and 3
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(2 marks)
87
88
June 2015 Examinations
ACCA F3 / FIA FFA
Accounting for Limited Companies
Q uestion 4
The following information is available about a company’s dividends:
2005
Sept
...
Chapter 13
$
Final dividend for the year ended 30 June 2005 paid (declared August 2005)
100,000
Interim dividend for the year ended 30 June 2006 paid
Final dividend for the year ended 30 June 2006 paid (declared August 2006)
40,000
120,000
What figures, if any, should be disclosed in the company’s Statement of Profit or Loss for the year
ended 30 June 2006 and its Statement of Financial Position as at that date?
Statement of Profit or Loss for the Statement of Financial
period
Position liability
A
$160,000 deduction
$120,000
B
$140,000 deduction
nil
C
nil
$120,000
D
nil
nil
(2 marks)
Q uestion 5
At 30 June 2005 the capital and reserves of Smith, a limited liability company, were:
$m
Share capital
Ordinary shares of $1 each
100
Share premium account
80
During the year ended 30 June 2006, the following transactions took place:
1 September 2005 bonus issue of one ordinary share for every two held, using the share premium
A
account
...
What would the balances on each account be at 30 June 2006?
Share capital
A
B
C
D
Share premium account
$m
210
210
240
240
$m
110
60
30
80
(2 marks)
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June 2015 Examinations
Chapter 14
ACCA F3 / FIA FFA
89
Free lectures are available on opentuition
...
In this chapter we will look at the required format and explain how to prepare a Statement of Cash
Flows
...
The purpose
is to provide users of the financial statements with more information than is provided just by the
Statement of Profit or Loss and Statement of Financial Position
...
An ordinary shareholder may
be puzzled by this, but maybe the explanation is that the company had very large expenditure on
non-current assets
...
3 The indirect method
There are two approaches allowed in preparing a Statement of Cash Flows – the direct method
and the indirect method
...
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90
June 2015 Examinations
ACCA F3 / FIA FFA
Statements of Cash Flows
Chapter 14
Statement of Cash Flows - PROFORMA
X plc Statement of Cash Flows for the year ended 31 December 2008
•
Cash flows from operating activities
Net profit before taxation
Adjustments for:
Depreciation
Profit on sale of non-current assets
Interest expense
Op
...
changes
Increase in accounts receivable
Increase in inventories
Increase in accounts payable
Cash generated from operations
Interest paid
Dividends paid
Taxation paid
Net cash from operating activities
$
x
x
(x)
x
x
(x)
(x)
x
x
(x)
(x)
(x)
Cash flows from investing activities
Purchase of non-current assets
Sale proceeds of non-current assets
Interest received
Dividends received
Net cash from investing activities
(x)
x
x
x
Cash flows from financing activities
Proceeds from issue of shares
Repayment of debenture loan
Net cash from financing activities
x
(x)
Net increase in cash & cash equivalents
Cash and cash equivalents b/f
Cash and cash equivalents c/f
$
x
x
x
x
x
x
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June 2015 Examinations
ACCA F3 / FIA FFA
Statements of Cash Flows
Chapter 14
E xample 1
Blair Limited -Statement of Financial Position as at 31 December 2008
2008
$
$
ASSETS
Non-current assets
545,000
Current assets:
Inventories
90,000
Receivables
83,000
Cash
45,000
218,000
763,000
EQUITY AND LIABILITIES
Capital and reserves:
$1 ordinary shares
Share Premium Account
Accumulated profits
Current liabilities:
Trade payables
Corporation tax payable
97,000
20,000
117,000
763,000
$
410,000
81,000
75,000
64,000
150,000
20,000
476,000
646,000
Statement of Profit or Loss for the year ended 31 December 2008
Turnover
Cost of sales
Gross profit
Administrative expenses
Operating profit
Interest
Profit before tax
Tax
Profit after tax
2007
$
220,000
630,000
100,000
431,000
531,000
69,000
30,000
99,000
630,000
$
1,000,000
700,000
300,000
199,000
101,000
1,000
100,000
39,000
$61,000
The following information is relevant:
(1) Administrative expenses include depreciation of $40,000
(2) During the year there had been sales of non-current assets for $30,000
...
(3) Dividends paid during the year were $16,000
Produce a Statement of Cash Flows for the year ended 31 December 2008
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91
92
June 2015 Examinations
Statements of Cash Flows
ACCA F3 / FIA FFA
Chapter 14
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June 2015 Examinations
ACCA F3 / FIA FFA
Statements of Cash Flows
Chapter 14
4 The direct method
In the previous paragraph, where we used the indirect method, we established the cash flow from
operations by taking the profit from the Statement of Profit or Loss and working backwards –
eliminating non-cash items and adjusting for changes in working capital
...
This is known as the direct method
...
)
The layout for arriving at the cash flow from operations is as follows:
Cash received from customers
Cash payments to suppliers
Cash paid to and on behalf of employees
Other cash payments
Net cash inflow from operating activities
x
(x)
(x)
(x)
x
E xample 2
Gatis has the following Statement of Profit or Loss for the year ended 31 December 2007:
$
Revenue
1,200,000
Cost of sales
(840,000)
Gross profit
360,000
Distribution and administrative expenses
(120,000)
Net profit before tax
240,000
The following are extracts from Gatis’s Statements of Financial Position:
2007
2006
$
$
Current assets
Inventory
160,000
140,000
Trade receivables
259,000
235,000
Current liabilities
Trade payables
168,000
138,000
You are given the following further information:
(1)
expenses include depreciation of $36,000, bad debt write-offs of $14,000 and employment costs of
$42,000
(2)
during the year Gatis disposed of a non-current asset for $24,000 which had a book value of $18,000,
the profit on which had been netted off expenses
...
(b) how the cash generated from operations would be presented on the Statement of Cash Flows
under the direct method
...
(2) Increase in inventory should have been added, not deducted
...
Which of the criticisms are valid?
A 2 and 3 only
B 1 only
C 1 and 3 only
D 2 only
(2 marks)
Q uestion 2
Which of the following items could appear in a company’s Statement of Cash Flows?
(1) Surplus on revaluation of non-current assets
(2) Proceeds of issue of shares
(3) Proposed dividend
(4) Dividends received
A
B
C
D
1 and 2
3 and 4
1 and 3
2 and 4
(2 marks)
Q uestion 3
In a Statement of Cash Flows which of the items below would not appear on the Statement of Cash
Flows?
A The nominal value of debentures redeemed at par during the year
B The dividends paid to preferred shareholders during the year
C The Statement of Profit or Loss charge for taxation for the year
D The purchase of long term investments
(2 marks)
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95
96
June 2015 Examinations
ACCA F3 / FIA FFA
Statements of Cash Flows
D ata
for questions
4
and
Chapter 14
5
Extracts from a company’s Statements of Financial Position show the following non-current assets at net
book value:
30 June
20X8
20X9
$
$
Intangible assets:
Development expenditure
60,000
95,000
Tangible assets:
Freehold
750,000
1,230,000
Plant and machinery
320,000
370,000
Fixtures and fittings
105,000
90,000
The expenditure for the year on development projects had been $55,000
...
Q uestion 4
W
hat is the amortisation charge included in the reconciliation of operating profit to net cash flows
from operating activities?
A $20,000
B $60,000
C $95,000
D $115,000
(2 marks)
Q uestion 5
What is the additions figure for tangible non-current assets included under investing activities?
A $515,000
B $615,000
C $175,000
D $1,690,000
(2 marks)
Q uestion 6
Which of the following statements are correct?
(1) A Statement of Cash Flows prepared using the direct method produces a different figure for operating
cash flow from that produced if the indirect method is used
...
(3) A surplus on revaluation of a non-current asset will not appear as an item in a Statement of Cash Flows
(4) A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing
Activities in a Statement of Cash Flows
...
com
BANK RECONCILIATIONS
1 Introduction
There are many errors that can be made in the bookkeeping – for example, it is very easy to enter a
number incorrectly – and it is therefore important to carry out as many checks as possible on the
accuracy
...
The balance on
both should be the same
...
In principle this check is very simple, but it can be a little more involved due, mainly, to the use of
cheques in many countries
...
Balance on bank statement
One important aspect to be aware of is that if you put money into the bank, the bank statement
will show a credit balance
...
The reason for this is that the bank statements
is a reflection of the balance on your account in the books of the bank
...
It is very easy to get confused in an exam question, and so be very careful
...
Cheques
Drawer (of cheque)
Unpresented cheques (or outstanding cheques)
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98
June 2015 Examinations
Bank Reconciliations
ACCA F3 / FIA FFA
Chapter 15
Deposits not yet credited
Dishonoured cheques
Credit transfers
Standing orders
Direct debits
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June 2015 Examinations
Bank Reconciliations
ACCA F3 / FIA FFA
Chapter 15
3 Reasons why the balance on the bank statement may differ from
the balance in the cash account
If there is a difference between the balance on the bank statement and the balance in the cash
account, then clearly we need to find out why
...
This is because of unpresented cheques and lodgements not credited
...
This is not a mistake on the
bank’s part – the transactions will appear at some time in the future – and so no correction
is necessary
...
If we cannot
reconcile the two then there must be errors remaining which we must find
...
4 The preparation of a bank reconciliation statement
(a) compare the cash account to the bank statement and tick off all items that agree
(b) any remaining items must be either errors or timing differences
(c)
correct any errors in the cash account by putting through the necessary debits or credits (in the
examination write up a t-account, starting with the balance given in the question and ending with
the correct balance)
(d) prepare a bank reconciliation statement
...
Pro-forma bank reconciliation statement:
Balance per bank statement
Add/Less bank errors
Add: Lodgements not credited
Less: Unpresented cheques
Balance as per (corrected) cash account
x
x
X
x
(x)
x
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June 2015 Examinations
Bank Reconciliations
ACCA F3 / FIA FFA
Chapter 15
E xample 1
At 31 December 2007, the balance on the cash account was $11,820 (DR) , but the balance appearing on the
bank statement was $15,000 (CR)
...
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101
102
June 2015 Examinations
Bank Reconciliations
ACCA F3 / FIA FFA
Chapter 15
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June 2015 Examinations
ACCA F3 / FIA FFA
Bank Reconciliations
Chapter 15
Test
Q uestion 1
The following bank reconciliation statement has been prepared by a trainee accountant:
Overdraft per bank statement
less: Outstanding cheques
add: Deposits credited after date
Cash at bank as calculated above
$
9,264
21,984
12,720
40,056
52,776
What should be the correct balance per the cash book?
A $52,776 balance at bank as stated
B $8,808 balance at bank
C $27,336 balance at bank
D $8,808 overdrawn
...
Which of these items will require an entry in the cash book?
A 2, 4 and 6
B 1, 5 and 6
C 3, 4 and 5
D 1, 2 and 3
(2 marks)
Q uestion 3
Which of the following statements about bank reconciliations are correct?
(1) In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of cash at
bank shown in the bank statement
...
(3) An error by the bank must be corrected by an entry in the cash book
...
A
B
C
D
1 and 3
2 and 3
1 and 4
2 and 4
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(2 marks)
103
104
June 2015 Examinations
ACCA F3 / FIA FFA
Chapter 15
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June 2015 Examinations
ACCA F3 / FIA FFA
Free lectures are available on opentuition
...
However, a great many of the transactions of a company involve purchases and sales on credit
...
This chapter covers a way of checking them
...
You will not be asked to write up these books, but, as you will see, it is very likely that you will be
presented with errors that have been made in these books
...
As a result, we end up with several ‘receivables’ accounts
...
To avoid any confusion, we call the account in the Nominal Ledger the Total Receivables Account,
or (more commonly) the Receivables Ledger Control Account
...
This total should agree
with the balance on the Receivables Ledger Control Account
...
If the Receivables Ledger Control Account contains errors, then our Financial Statements will be
incorrect
...
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106
June 2015 Examinations
Control Accounts
ACCA F3 / FIA FFA
Chapter 16
3 Returns, discounts, and contra entries
Before we look at examples of control accounts, there are three ‘special’ types of entry that we
need to consider
...
Returns
Suppose we sell goods for $500 on credit to Mr X
...
Clearly, the return must be recorded in the individual account in the Receivables Ledger, and the
Receivables Ledger Control Account in the Nominal Ledger
...
Mr Y does pay the account within 1 month and therefore pays us only $950
Clearly, the discount must be recorded in the individual account in the Receivables Ledger, and
the Receivables Ledger Control Account in the Nominal Ledger
...
Mr Z also happens to be a supplier, and we buy goods from him for $1,000 on credit
...
This bookkeeping entry to ‘cancel’ or ‘set-off ’ the balances is known as a contra entry
...
4 The Payables Ledger Control Account
Throughout this chapter so far, we have been using sales on credit to illustrate the use of Control
Accounts
...
Returns, discounts and contra entries stand to be applicable in exactly the same sort of way as with
the Receivables Ledger Control Account
...
At 1 September 2007 the following balances existed in the company’s accounting records, and the
control accounts agreed:
Debit
Credit
$
$
Receivables ledger control account
186,220
–
Payables ledger control account
–
89,290
The following are the totals of transactions which took place during September 2007, as extracted from the
company’s records
...
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June 2015 Examinations
Control Accounts
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ACCA F3 / FIA FFA
Chapter 16
109
110
June 2015 Examinations
ACCA F3 / FIA FFA
Control Accounts
Chapter 16
Test
Q uestion 1
The following control account has been prepared by a trainee accountant:
Receivables ledger control account
Opening balance
Credit sales
Cash sales
Contras against credit balances in
payables ledger
$
740,640 Cash received from credit customers
370,080 Discounts allowed to credit customers
211,440 Interest charged on overdue accounts
$
353,280
3,360
5,760
11,040 Irrecoverable debts written off
1,333,200
Allowance for receivables
Closing balance
11,760
6,720
952,320
1,333,200
What should the closing balance be when all the errors made in preparing the receivables ledger control account have been corrected?
A $948,480
B $730,320
C $742,800
D $737,040
(2 marks)
Q uestion 2
Peter received a statement of account from a supplier Paul, showing a balance to be paid of $8,950
...
Investigation reveals the following:
(1) Cash paid to Paul $4,080 has not been allowed for by Paul
(2) Peter’s ledger account has not been adjusted for $40 of cash discount disallowed by Paul
...
The following details relate to his transactions
with credit customers and suppliers for the year ended 30 June 2008:
Trade receivables, 1 July 2007
Trade payables, 1 July 2007
Cash received from customers
Cash paid to suppliers
Discounts allowed
Discounts received
Contra between payables and receivables ledgers
Trade receivables, 30 June 2008
Trade payables, 30 June 2008
$
130,000
60,000
686,400
302,800
1,400
2,960
2,000
181,000
84,000
What figure should appear in Edgar’s Statement of Profit or Loss for the year ended 30 June 2008 for
purchases?
A $331,760
B $740,800
C $283,760
D $330,200
(2 marks)
Q uestion 4
The total of the list of balances in Adele’s payables ledger was $438,900 at 30 June 2008
...
The following errors were discovered:
(1) A contra entry of $980 was recorded in the payables ledger control account, but not in the payables
ledger
...
(3) An invoice for $4,344 was posted to the supplier’s account as $4,434
...
What should the closing balance be when all the errors are corrected?
A $128,200
B $509,000
C $224,200
D $144,600
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(2 marks)
June 2015 Examinations
Chapter 17
ACCA F3 / FIA FFA
113
Free lectures are available on opentuition
...
They are a
good way of testing your knowledge and understanding of bookkeeping, without requiring you to
produce lots of t-accounts
...
However,
subsequently various errors and omissions have been discovered
...
However, you are not required to produce a new
Statement of Profit or Loss
...
E xample 1
Alison’s draft financial statements show a net profit for the year of $52,380
...
(b) Closing inventory valued in the draft accounts at its cost of $8,920, was believed to have a potential sales
value of $7,930
(c)
Goods which had cost $2,000 had been sent to a customer just before the year end on a sale or return
basis
...
No confirmation of the
sale had been received from the customer
...
No adjustment had been made for this when preparing the draft accounts
...
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114
June 2015 Examinations
Adjustments to Profit and Suspense Accounts
ACCA F3 / FIA FFA
Chapter 17
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June 2015 Examinations
ACCA F3 / FIA FFA
Adjustments to Profit and Suspense Accounts
Chapter 17
3 Suspense Accounts
In an earlier chapter we looked at the Trial Balance
...
However, it is likely that the difference on the trial balance is the net result of several errors
...
It
would then be useful to have a note of how much errors still remained in order that we would
know when we had finally found all the errors!
A common way of doing this (and a common exercise in the examination) is to open a t-account
called the Suspense Account (or Difference Account) with a balance equal to the trial balance
difference
...
However, it does provide a useful check when finding errors
...
When all the errors have been found, the balance
on the Suspense Account will fall to zero
...
Motor Van, at cost
Inventory
Receivables Ledger Control
Cash at bank
Petty Cash
Payables Ledger Control Account
Prepayments
Accruals
Motor Van – accumulated depreciation
Sales
Purchases
Rent expense
Wages expense
Electricity expense
Telephone expense
Accountancy expense
Van expenses
Depreciation expense
Capital
Dr
5,500
6,230
19,167
218
50
490
76,182
1,200
12,500
516
230
500
280
1,000
Cr
13,166
70
2,000
93,870
10,000
124,063
119,106
The trial balance does not balance, and Biruta realises that this means that there must be errors in the
bookkeeping
...
The correct figure was
entered in the receivables ledger control account, but it was posted to the sales account as $1,832
(b) The balance on the electricity account was incorrectly recorded and should read $615
(c) One cash payment for electricity of $200 had been recorded throughout as $20
(d) When accounting for the telephone accrual of $70 at the year end, a single entry had been made
...
(e) A mistake had been made when casting the purchases account
...
For each error make any relevant entries in the suspense
account
...
Which one of the following errors would fully account for the difference?
A $960 paid for plant maintenance has been correctly entered in the cash book and credited to the plant
asset account
...
(2 marks)
Q uestion 2
A company’s Statement of Profit or Loss for the year ended 31 December 2005 showed a net profit of $200,640
...
It is the company’s policy to depreciate motor vans at 25% per year on the straight line basis, with a
full year’s charge in the year of acquisition
...
The following errors
were found in Tom’s accounting records:
(1) In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share
capital account as $330,000
(2) Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the
plant asset account
(3) The petty cash book balance $500 had been omitted from the trial balance
(4) A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account
as $87,400
...
Their cost to James was $1,500
...
In November 2006 the customer accepted half of the goods and returned the other half in good
condition
...
B Sales and receivables should be reduced by $1,250, and closing inventory increased by $750
C Sales and receivables should be reduced by $2,500, with no adjustment to closing inventory
D No adjustment is necessary
(2 marks)
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117
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June 2015 Examinations
ACCA F3 / FIA FFA
Adjustments to Profit and Suspense Accounts
Chapter 17
Q uestion 5
A business received a delivery of goods on 29 June 2006, which was included in inventory at 30 June 2006
...
What effect will this have on the business?
(1) Profit for the year ended 30 June 2006 will be overstated
...
(3) Profit for the year ending 30 June 2007 will be overstated
...
A
B
C
D
1 and 2
2 and 3
1 only
1 and 4
(2 marks)
Q uestion 6
Which of the following errors would cause a trial balance not to balance?
(1) An error in the addition in the cash book
...
(3) Cost of a motor vehicle debited to motor expenses account
...
(4) oods taken by the proprietor of a business recorded by debiting purchases and crediting drawings
G
account
...
com
MARK-UP AND MARGINS
1 Introduction
Occasionally it is the case that all selling prices are calculated so as to give a fixed percentage
profit
...
Make sure that you can do the arithmetic, but that also you learn the terminology and
remember the difference between a mark-up and a gross profit margin
...
E xample 1
(a) Jelena has cost of goods sold of $20,000 and applies a mark-up of 20%
...
What is her cost of goods sold?
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120
June 2015 Examinations
ACCA F3 / FIA FFA
Mark-up and Margins
Chapter 18
3 Gross profit margin
The gross profit margin is the gross profit expressed as a percentage of the selling price
...
His gross profit is 20%
...
What are his sales?
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June 2015 Examinations
ACCA F3 / FIA FFA
Mark-up and Margins
Chapter 18
Test
Q uestion 1
A fire on 30 September destroyed some of a company’s inventory and its inventory records
...
Between 31 May and 4 June 2008, the following transactions took place:
Purchases of goods
Sales of goods (profit margin 30% on sales)
Goods returned by X to supplier
$
8,600
14,000
700
What adjusted figure should be included in the financial statements for inventories at 31 May 2008?
A $838,100
B $853,900
C $818,500
D $834,300
(2 marks)
Q uestion 3
The draft accounts of Anthea Co
...
After correction of these errors the gross profit percentage will be:
A 33
...
7%
C 31
...
8%
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(2 marks)
121
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June 2015 Examinations
ACCA F3 / FIA FFA
Mark-up and Margins
Chapter 18
Q uestion 4
Silver Co made sales of $193,200 during the year ended 31 August X1
...
What was the cost of purchases during the year, to the nearest $1,000?
A $149,000
B $136,000
C $123,000
D $109,000
(2 marks)
Q uestion 5
On 1 September 2006, a business had inventory of $380,000
...
On 30 September 2006 a fire destroyed some of the inventory
...
The business operates with a standard gross profit margin of 30%
...
Details recorded of
her transactions for September 2006 are as follows:
1 Sept
...
Inventories
Purchases for month
Cash banked for sales for month
Inventories
$
40,000
60,000
95,000
50,000
Which two of the following conclusions could separately be drawn from this information?
(1) $5,000 cash has been stolen from the sales revenue prior to banking
(2) Goods costing $5,000 have been stolen
(3) Goods costing $2,500 have been stolen
(4) Some goods costing $2,500 had been sold at cost price
A
B
C
D
1 and 2
1 and 3
2 and 4
3 and 4
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(2 marks)
June 2015 Examinations
Chapter 19
ACCA F3 / FIA FFA
123
Free lectures are available on opentuition
...
In this chapter we will explain the main conventions and concepts, but you must also read the
relevant chapter in the Study Text in detail
2 The fundamental accounting concepts
...
Fair presentation
Financial statements should be ‘fairly presented’
Going concern
It is assumed that a business will continue to operate for the foreseeable future
...
Consistency
Items should be treated in the same way from one period to the next, unless there is a significant
change in the nature of the operations
...
e
...
Sale of goods:
Revenue should be recognised when all of the following conditions have been satisfied:
(a) all the significant risks and rewards have been transferred to the buyer
(b) the seller retains no effective control over the goods sold
(c) the amount of revenue can be reliably measured
(d) the benefits to be derived from the transaction are likely to flow to the enterprise
(e) the costs incurred or to be incurred for the transaction can be reliably measured
Services:
The difference with services is that the service given is often spread over a period of time
...
The same conditions apply as for sale of goods, except for condition (a) above
...
(2 marks)
Q uestion 2
The IASB’s Framework for the preparation and presentation of financial statements gives qualitative
characteristics that make financial information reliable
...
Is this statement true or false?
A True
B False
(2 marks)
Q uestion 4
What is the role of the International Financial Reporting Interpretations Committee?
A To create a set of global accounting standards
B To issue guidance on the application of International Financial Reporting Standards
(2 marks)
Q uestion 5
Which of the following statements are correct?
(1) Materiality means that only items having a physical existence may be recognised as assets
...
(3) The money measurement concept is that only items capable of being measured in monetary terms can
be recognised in financial statements
...
com
IAS 10: EVENTS AFTER THE
REPORTING PERIOD
1 Introduction
This chapter covers the provisions of IAS 10
...
2 IAS 10: Events after the reporting period
If a company has a year end of 31 December 2008, then it will be some time before the financial
statements are finalised and signed by the directors
...
It may not be until (say)
20 March 2009 before the financial statements become final and are signed
...
If
we discover any errors after 20 March 2009, then it is too late to change anything
...
There are two types of events:
Adjusting events
There are events that provide additional evidence about the estimation of amount at the Statement
of Financial Position date (for example, the auditors discover an error in the valuation of inventory)
...
Non-adjusting events
These are events that do not affect the value of assets and liabilities at the Statement of Financial
Position date (for example, a factory is destroyed by fire after the date of the Statement of Financial
Position)
...
However, if the amount is material,
they will be disclosed by way of a note giving details of the event
...
(2) Sale of inventory held at the Statement of Financial Position date for less than cost
...
(4) The insolvency of a customer with a debt owing at the Statement of Financial Position date which is still
outstanding
...
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(2 marks)
131
132
June 2015 Examinations
IAS 10: Events after the Reporting Period
ACCA F3 / FIA FFA
Chapter 20
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June 2015 Examinations
Chapter 21
ACCA F3 / FIA FFA
133
Free lectures are available on opentuition
...
Intangible assets are assets which have a value to the business, but cannot be
touched (i
...
have no physical substance)
...
2 Goodwill
Goodwill is the excess of the value of a business over the fair value of the net assets
...
It is commonly the case
that the consideration paid is greater than the fair value of the net assets, and this excess is the
goodwill
...
A company could therefore claim that there was an extra asset of goodwill
...
This is because no event has occurred to identify the value of the business
...
Research
This is ‘original and planned investigation undertaken with the prospect of gaining new scientific
or technical knowledge and understanding’
...
Accounting treatment
Research expenditure should all be charged to the Statement of Profit or Loss as an expense in
the period in which it is incurred
...
If the conditions are not fulfilled, then the expenditure should be written off in the Statement of
Profit or Loss in the period incurred
...
If any tangible assets are purchased then
they must be capitalised and depreciated as normal
...
The position of each development project should be reviewed each year
...
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135
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June 2015 Examinations
Intangible Assets: Goodwill, Research and Development
ACCA F3 / FIA FFA
Chapter 21
Test
Q uestion 1
Which of the following statements are correct?
(1) Capitalised development expenditure must be amortised over a period not exceeding five years
...
A
B
C
D
2 only
2 and 3
1 only
1 and 3
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(2 marks)
June 2015 Examinations
Chapter 22
ACCA F3 / FIA FFA
137
Free lectures are available on opentuition
...
This can
happen in many ways, but you will only be expected to deal with the simplest situation, which is
where one company controls one other company
...
However, another set of accounts will be
prepared for the group as a whole
...
In this and the next chapter we will look at the Consolidated Statement of Financial Position
...
2 Definitions
Consolidated accounts are required if ever one company controls another
...
Parent company
The parent company is the company that controls the other company
...
Group of companies
This is the parent company plus its subsidiaries
...
Non-controlling interest
If the parent company does not own 100% of the subsidiary then the part owned by others is
known as the non-controlling interest
...
We will work through a simple example and then gradually bring in the various complications that
can occur
...
On 31 December 2010, the Statements of Financial Position of each the two companies were as follows:
P
S
Non-current assets
25,000
12,000
Investment in S, at cost
10,000
Current assets
8,000
9,000
43,000
21,000
Share capital - $1 shares
Retained earnings
Current liabilities
25,000
15,000
3,000
43,000
10,000
8,000
3,000
21,000
Prepare a Consolidated Statement of Financial Position at 31 December 2010 for the P group
...
e
...
Very often a company acquires another company some years after incorporation in which case the
company will have earned profits by the time that they are acquired
...
These profits earned before the date of acquisition are known as preacquisition profits
...
At 31 December 2009 the companies’ Statements of Financial Position were as follows:
Non-current assets
Investment in S, at cost
Current assets
P
55,000
28,000
18,000
101,000
S
25,000
14,000
39,000
Share capital - $1 shares
Retained earnings
Current liabilities
60,000
20,000
38,000
15,000
3,000
4,000
101,000
39,000
Prepare the Consolidated Statement of Financial Position at 31 December 2009 for the P group
...
However, there are two reasons why the parent company may have paid more than this amount
...
We would therefore expect the parent
company to have paid a ‘fair value’ for the assets
...
If they did pay for
goodwill, then although it will not appear in the accounts of the individual companies it will mean
that there is an extra asset to appear in the consolidated Statement of Financial Position
...
On 1 January 2005, the retained
earnings of S were $15,000 and the fair value of the non-current assets was $9,000 more than the carrying
value
...
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June 2015 Examinations
ACCA F3 / FIA FFA
Group Accounts The Consolidated Statement of Financial Position (1)
Chapter 22
E xample 4
P acquired 100% of the share capital of S on 1 July 2004 for $25,000
...
At 30 June 2010 the companies’ Statements of Financial Position were as follows:
Non-current assets
Investment in S, at cost
Current assets
P
76,000
25,000
12,000
113,000
S
18,000
9,000
27,000
Share capital - $1 shares
Retained earnings
Current liabilities
40,000
5,000
70,000
20,000
3,000
2,000
113,000
27,000
Prepare a Consolidated Statement of Financial Position as at 30 June 2010 for the P group
...
At 31 December 2009 the companies‘ Statements of Financial Position were as follows:
P
Z
Non-current assets
Investment in Z, at cost
Current assets
123,000
90,000
30,000
243,000
40,500
Share capital - $1 shares
Retained earnings
Current liabilities
75,000
165,000
3,000
243,000
15,000
42,000
1,500
58,500
18,000
58,500
Q uestion 1
What amount should appear for goodwill in the consolidated statement of financial position?
A 67,500
B 52,500
C 75,000
D 90,000
(2 marks)
Q uestion 2
What amount should appear for retained earnings in the consolidated statement of financial
position?
A 187,500
B 207,000
C 184,500
D 19,500
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(2 marks)
143
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June 2015 Examinations
ACCA F3 / FIA FFA
Group Accounts The Consolidated Statement of Financial Position (1)
Chapter 22
T he following information is relevant for questions 3 and 4
A acquired 100% of the share capital of Z on 1 August 2003 for $60,000 on which day the retained earnings
of Z were $14,400 and the fair value of the non-current assets was $15,000 more than their carrying value
...
com
GROUP ACCOUNTS
THE CONSOLIDATED STATEMENT
OF FINANCIAL POSITION (2)
1 Introduction
In the previous chapter we looked at the Consolidated Statement of Financial Position
...
In this chapter we will look at what happens when the parent company owns less than 100% but
still has control of the subsidiary
...
2 Non-controlling interest
The fundamental point when the parent company owns less than 100% of the subsidiary is that in
the Consolidated Statement of Financial Position we still show all the assets and liabilities of the
group (because the parent company controls them), but we need to take account of the fact that
part of these are in fact owned by the non-controlling interest
...
On 31 December 2010, the Statements of Financial Position of each of the two companies were as follows:
Non-current assets
Investment in S, at cost
Current assets
Share capital - $1 shares
Retained earnings
Current liabilities
145
P
30,000
8,000
7,000
45,000
S
15,000
6,000
21,000
25,000
15,000
5,000
45,000
10,000
8,000
3,000
21,000
Prepare a Consolidated Statement of Financial Position at 31 December 2010 for the P group
...
However you will remember from the previous chapter that it is more likely that P would have
acquired the holding on a later date and therefore may have paid more due to paying for goodwill
...
The calculation of the goodwill arising on consolidation therefore becomes as follows:
Fair value of consideration transferred
Plus: fair value of non-controlling interest at date of acquisition
Less:fair value of net assets at date of acquisition
Share capital
Retained earnings at date of acquisition
X
X
X
X
X
Goodwill arising on consolidation
(X)
X
Consider the following example:
E xample 2
P acquired 60% of the shares in S on 1 January 2007 when the retained earnings of P stood at $6,000
...
On 31 December 2010, the Statements of Financial Position of each of the two companies were as follows:
P
S
Non-current assets
50,000
30,000
Investment in S, at cost
40,000
Current assets
14,000
12,000
104,000
42,000
Share capital - $1 shares
Retained earnings
Current liabilities
50,000
44,000
10,000
104,000
20,000
16,000
6,000
42,000
Calculate the amount of the goodwill arising on consolidation
...
However,
as before we will have an extra figure in the Statement of Financial Position showing the amount
owing to the non-controlling interest
...
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149
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June 2015 Examinations
ACCA F3 / FIA FFA
Group Accounts The Consolidated Statement of Financial Position (2)
Chapter 23
(Note: you may be wondering why we have not calculated the non-controlling interest in the same
way as in example 1 – i
...
by just taking 40% of the share capital and reserves of S
...
We can calculate this and thus check the NCI as follows:
Fair value of NCI at date of acquisition
NCI in net assets at date of acquisition
(40% x (20,000 + 6,000)
Goodwill attributable to NCI
30,000
10,400
19,600
NCI at 31 December 2010:
Share capital (40% x 20,000)
Retained earnings (40% x 16,000)
Goodwill attributable to NCI
Total NCI
8,000
6,400
19,600
34,000
This is the same figure that we have already calculated
...
This will be calculated in the
normal way:
Retained earnings of P
Retained earnings of S
Less: pre-aquisition profits
Post-acquisition profits of S
P’s share of post-acquisition profits of S
X
X
X
X
X
X
E xample 4
Using the information in example 2, calculate the retained earnings for inclusion in the Consolidated
Statement of Financial Position as 31 December 2010
...
E xample 5
Using the information in example 2 (and the workings from the later examples) prepare the
Consolidated Statement of Financial Position at 31 December 2010 for the P group
...
It is quite possible that the two companies trade with each other – i
...
that the parent company
sells goods to the subsidiary company (or vice versa)
...
(a) Inter-entity balances
E xample 6
Company P has a controlling interest in company S
...
S’s payables include the $8,000 owing to P
...
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June 2015 Examinations
Group Accounts The Consolidated Statement of Financial Position (2)
ACCA F3 / FIA FFA
Chapter 23
(b) Inventory sold at a profit within the group
The problem here relates to the situation where one of the companies has sold goods to
the other company at a profit, and the receiving company still has some of the goods in
inventory
...
If, however, some of the goods are still in inventory then there are two problems when we
come to prepare consolidated accounts:
(i) inventory in the accounts of the receiving company will include the profit made by
the
the selling company, whereas in the consolidated accounts we should be showing it at
cost to the group
...
However the profit on any goods still in inventory should not be
included in the profit of the group because the goods have not left the group (and the
profit has therefore not been realised)
To deal with both problems we do the following:
(i)
calculate the unrealised profit in inventory,
(ii)
reduce the inventory and reduce the retained earnings of the company that has sold the
goods by the amount of the unrealised profit
...
The Statements of Financial Position of the two
entities as at 31 December 2010 are as follows:
P
S
Non-current assets
50,000
25,000
Investment in S, at cost
15,000
Inventory
13,000
7,000
Other current assets
10,000
6,000
88,000
38,000
Share capital - $1 shares
Retained earnings
Current liabilities
45,000
20,000
30,000
15,000
13,000
3,000
88,000
38,000
During December 2010 S had sold goods to P for $6,000
...
P had not sold any of these goods and all were therefore included in inventory
...
Prepare a Consolidated Statement of Financial Position at 31 December 2010
...
On 31 December 2010, the Statements of Financial Position of each of the two companies were as follows:
Non-current assets
Investment in S, at cost
Current assets
Share capital - $1 shares
Retained earnings
Current liabilities
X
70,000
21,600
27,000
118,600
Y
36,000
62,000
44,600
12,000
118,600
24,000
19,500
7,500
51,000
15,000
51,000
Q uestion 1
What amount for goodwill should appear in the consolidated statement of financial position?
A 21,600
B 24,000
C Zero
D 19,500
(2 marks)
Q uestion 2
What amount for retained earnings should appear in the consolidated statement of financial
position?
A 64,100
B 62,150
C 17,550
D 44,600
(2 marks)
Q uestion 3
What amount for non-controlling interest should appear in the consolidated statement of financial
position?
A 4,350
B 1,950
C 2,400
D 21,900
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(2 marks)
155
156
June 2015 Examinations
ACCA F3 / FIA FFA
Group Accounts The Consolidated Statement of Financial Position (2)
Chapter 23
T he following information is relevant for questions 4, 5 and 6
On 1 January 2008, Orange paid acquired 70% of the ordinary shares of Apple, when the retained earnings of
Apple stood at $15,000
...
On 31 December 2010, the Statements of Financial Position of each of the two companies were as follows:
Non-current assets
Investment in S, at cost
Current assets
Share capital - $1 shares
Retained earnings
Current liabilities
Orange
125,000
50,000
30,000
205,000
120,000
65,000
20,000
205,000
Apple
75,000
15,000
90,000
50,000
32,000
8,000
90,000
Q uestion 4
What amount for goodwill should appear in the consolidated statement of financial position?
A
4,500
B 25,000
C 15,000
D 23,000
(2 marks)
Q uestion 5
What amount for non-controlling interest should appear in the consolidated statement of financial
position?
A 24,600
B 46,900
C
5,100
D 45,100
(2 marks)
Q uestion 6
What amount for retained earnings should appear in the consolidated statement of financial
position?
A 70,100
B 76,900
C 11,900
D 97,000
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(2 marks)
June 2015 Examinations
Chapter 24
ACCA F3 / FIA FFA
157
Free lectures are available on opentuition
...
Similarly it is necessary for us to prepare a Consolidated Statement of Profit or Loss and we will
look at how this is prepared in this chapter
...
We will use the same principles as we applied for the Statement of Financial Position in that we
will show the total profits made by the group and then show the extent to which these profits are
owned by the parent company and are owned by the non-controlling interest
...
The respective Statements of Profit or Loss of the two companies for the year ended 31 December 2009 are
as follows:
Revenue
Cost of sales
Gross profit
Expenses
Profit before taxation
Income tax
Profit for the year
Note: movement on retained earnings
Retained earnings brought forward
Profit for the year
Retained earnings carried forward
P
52,000
12,000
40,000
8,000
32,000
12,000
20,000
S
24,000
10,000
14,000
4,000
10,000
3,000
7,000
80,000
20,000
100,000
20,000
7,000
27,000
Prepare the Consolidated Statement of Profit or Loss and the movement on retained earnings for the
P group
...
However, if P acquired S at a later date then P is only entitled to its share of S’s post-acquisition
retained earnings (just as when we prepared the Consolidated Statement of Financial Position)
...
The respective Statements of Profit or Loss of the two companies for the year ended 31 December 2010 are
as follows:
P
S
Revenue
85,000
31,000
Cost of sales
21,000
12,000
Gross profit
64,000
19,000
Expenses
12,000
7,000
Profit before taxation
52,000
12,000
Income tax
16,000
4,000
Profit for the year
36,000
8,000
Note: movement on retained earnings
Retained earnings brought forward
Profit for the year
Retained earnings carried forward
120,000
36,000
156,000
17,000
8,000
25,000
Prepare the Consolidated Statement of Profit or Loss and the movement on retained earnings for the
P group
...
When one company in the group sells goods to another company in the group, then the sales will
have been included in the revenue of the selling company and an identical amount will have been
included in the cost of sales of the other company
...
In the Consolidated Income Statement, the figure for sales revenue should represent sales to
outsiders, and the figure for cost of sales should represent purchases from outsiders
...
You will also remember from the previous chapter that if any goods sold at a profit within the
group are still in inventory, then the unrealised profit needs to be excluded from the group profit
...
e
...
E xample 3
P acquired 55% of S on 1 June 2008
...
One quarter of these goods
remained in P’s inventory at the year end
...
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June 2015 Examinations
Chapter 25
ACCA F3 / FIA FFA
Free lectures are available on opentuition
...
2 The definition of a subsidiary
A subsidiary is an entity controlled by another entity
...
Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries,
more than one half of the voting power of an entity unless, in exceptional circumstances, it can be
clearly demonstrated that such ownership does not constitute control
...
Significant influence is the power to participate in the financial and operating policy decisions of
the entity, but not to control these policies
...
IAS 28 requires the use of what is called the equity method of accounting for investments in
associates
...
(Note that the associate’s revenue and costs are not added to those of the group as with a
subsidiary – we simply add the group’s share of the associate’s profit
...
This figure is the original cost of the investment plus the group’s share of
post-acquisition retained earnings of the associate
...
If there are no subsidiaries (and therefore no consolidated
accounts) then the associate is treated simply as a trade investment and shown as a noncurrent asset
...
com
INTERPRETATION OF
FINANCIAL STATEMENTS
1 Introduction
Financial statements are prepared to assist users in making decisions
...
In this chapter we will look at the various ratios that you should learn for the examination
...
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164
June 2015 Examinations
ACCA F3 / FIA FFA
Interpretation of Financial Statements
Chapter 26
3 Worked example
E xample 1
Statements of Financial Position as at 30 June
2010
$
ASSETS
Non-current assets
Current assets
Inventory
Receivables
Cash
2,414
2,275
864
$
2009
$
3,218
5,553
8,771
$
1,982
2,090
1,699
240
4,029
6,011
EQUITY AND LIABILITIES
Share capital and reserves
5,255
3,361
Non-current liabilities
1,200
960
Current liabilities
2,316
8,771
1,690
6,011
Statement of Profit or Loss for the year ended 30 June
2010
2009
$
$
Revenue
17,232
13,044
Cost of sales
12,924
10,109
Gross profit
4,308
2,935
Distribution costs
804
610
Administrative expenses
1,608
1,217
Profit from operations
1,896
1,108
Finance costs
120
125
Profit before taxation
1,776
983
Company tax expense
629
346
Profit after taxation
1,147
637
You are required to calculate the profitability, liquidity and gearing ratios
...
However, it is important that you are able to discuss briefly the
relevance of the various ratios, and also their limitations
...
Many of the ratios use figures from the Statement of Financial Position
...
For example, the level of receivables
could be unusually high at the year end, simply because a lot of invoicing was done just before
the year end
...
Normally in the examination you will be expected simply to use Statement of Financial Position
figures at the end of the year, but do be prepared to state the problem if relevant
...
The accounts of Lola plc for year ended 31 December 2010 include the following information:
Revenue 7,200
Gross profit
2,376
Net profit
1,080
Inventory
300
Trade receivables
624
Cash 1,608
Trade payables
1,890
Q uestion 1
Calculate the net profit percentage
...
A 33%
B 66%
C 15%
D 85%
(2 marks)
Q uestion 3
Calculate the receivables payment period (all sales are on credit)
...
A 1
...
34
C 0
...
75
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(2 marks)
167
168
June 2015 Examinations
Interpretation of Financial Statements
ACCA F3 / FIA FFA
Chapter 26
Q uestion 5
Calculate the quick ratio
...
18
B 1
...
49
D 0
...
com
THE REGULATORY FRAMEWORK
1 Introduction
In this chapter we will look briefly at the regulatory system that exists for financial
accounting, and the role of International Financial Reporting Standards
...
In a perfect world, all accounts would be prepared according to the same ‘set of rules’
...
IFRS’s do not have the force of law, but most countries have changed their rules to be consistent
with the IFRS’s
...
4 The International Accounting Standards Board (IASB)
It is the IASB that is actually responsible for issuing the IFRS’s
...
6 e International
Th
Committee (IFRIC)
169
Financial
Reporting
Interpretations
IFRIC issues guidance on the interpretation of IFRS’s
...
After all the
comments have been considered, and revisions made where appropriate, the final version of the
IFRS is published
...
IFRS’s are developed within this framework
...
com
BUSINESS DOCUMENTATION
1 Introduction
The purpose of this chapter is to list the various business documents that the examiner expects
you to be aware of
...
Purchase order
Details of the quantities ordered from the supplier (which can be used to check against when the
goods and invoice are received)
...
Goods despatched note (or delivery note)
A list prepared by the supplier and included with the goods (which serves the same purpose (and
is often used instead of ) the goods receive note)
...
The balance is often analysed according to its age (for
example up to 1 month old, between 1 and 2 months old, etc
...
Debit note
Produced by the customer when goods are returned (for checking against the credit note when it
received from the supplier)
...
Receipt
Issued to the customer by the supplier confirming that payment has been received
...
com
Paper F3
ANSWERS TO EXAMPLES
Chapter 1
No Examples
Chapter 2
Answer to Example 1
Increase in net assets = capital introduced + profit – drawings
32,000 – 25,000 = 10,000 + Profit – 7,000
7,000
= Profit + 3,000
Profit = $4,000
Answer to Example 2
Increase in net assets = capital introduced + profit – drawings
150,000 – 118,000 = 0 + 54,000 – drawings
32,000
= 54,000 – drawings
Drawings
= 54,000 – 32,000 = $22,000
Chapter 3
Answer to Example 1 and 2
Balance
Cash a/c
5,000 Car
800 Purchases
500 Rent
Payables
Withdrawals
Balance
6,300
4,100
Cash
Car a/c
1,000
Capital
Sales
Receivables
Capital a/c
Cash
1,000
500
200
400
100
4,100
6,300
Cash
Payables
Balance
Cash
Balance
173
Payables a/c
400 Purchases
200
600
Balance
600
Cash
Purchases a/c
500
600
Balance
1,100
1,100
Rent a/c
200
600
200
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5,000
1,100
1,100
174
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Balance
Sales a/c
Cash
Receivables
1,700
1,700
Balance
800
900
1,700
1,700
Sales
Balance
Receivables a/c
900 Cash
900
400
Balance
500
400
900
Withdrawals a/c
100
Cash
Answer to Example 3
Trial Balance
Debit
$
4,100
Cash
Capital
Car
Purchases
Payables
Rent
Sales
Receivables
Withdrawals
1,000
1,100
200
400
100
6,900
Credit
$
5,000
200
1,700
6,900
Answer to Example 4
Balance
Cash
4,100
Balance
Capital
Balance
Car
1,000
Balance
Purchases
1,100
1,100
Payables
Balance
5,000
SOPOL
1,100
1,100
Balance
Sales
1,700 Balance
1,700
1,700
SOPOL
Balance
200
200
200
Rent
200 SOPOL
200
1,700
Balance
Receivables
400
Withdrawals
100
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June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Purchases
Rent
Balance
Statement of Profit or Loss
1,100 Sales
200
400
1,700
Balance (Profit)
1,700
1,700
400
Answer to Example 5
Statement of Financial Position
$
ASSETS
Non-current assets
Car
Current assets
Cash
Receivables
4,100
400
CAPITAL AND LIABILITIES
Capital
Capital Introduced
Profit
Less: Withdrawals
5,000
400
(100)
$
1,000
Current liabilities
Payables
200
4,500
5,500
5,300
200
5,500
Chapter 4
Answer to Example 1
Cash
Cash
Insurance
800 Prepayments a/c
2,000
SOPOL
2,800
1,000
1,800
2,800
Statement of Profit or Loss
Expenses:
Insurance
1,800
Answer to Example 2
Cash
Cash
Cash
Accruals
Telephone
500
600
750
SOPOL
950
2,800
Insurance
Prepayments
1,000
Statement of Financial Position
Current Assets
Prepayment
Accruals
Telephone
2,800
2,800
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1,000
950
175
176
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Statement of Profit or Loss
Expenses:
Telephone
Statement of Financial Position
Current Liabilities
Telephone
2,800
Answer to Example 3
Balance b/f
Prepayments
1,000 Insurance
1,000
Insurance
1,200
1,000
1,000
Expenses:
Insurance
Insurance
Prepayments
Cash
1,000
2,400 Prepayments
SOPOL
3,400
Statement of Financial Position
Current Assets
Prepayment
Statement of Profit or Loss
2,200
Answer to Example 4
Accruals
Telephone
950 Balance b/f
950
Accruals
950
950
1,500
Expenses:
Telephone
Cash
Cash
Cash
Cash
Accruals
Statement of Financial Position
Current Liabilities
Accruals
Statement of Profit or Loss
5,050
Telephone
950 Accruals
1,000
1,200
1,350
1,500 SOPOL
6,000
1,500
No Examples
Chapter 6
Answer to Example 1
2002:
2003:
2004:
12, 000 − 2, 000
= 2, 000 p
...
5
9/12 × 2,000
Statement of Profit or Loss:
Depreciation
Statement of Financial Position:
Cost
Less: Accumulated Depreciation
1,200
2,200
3,400
1,200
Chapter 5
Depreciation =
950
1,500
2,000
2,000
31
...
2002
31
...
2003
31
...
2004
1,500
2,000
2,000
12,000
(1,500)
10,500
12,000
(3,500)
8,500
12,000
(5,500)
6,500
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950
5,050
6,000
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Answer to Example 2
Yr 1
Cost
Depreciation (20%)
Yr 2
Depreciation (20%)
Yr 3
Depreciation (20%)
15,000
(3,000)
12,000
(2,400)
9,600
(1,920)
7,680
Statement of Profit or Loss:
Depreciation
Statement of Financial Position:
Cost
Less: Accumulated Depreciation
Year 1
Year 2
Year 3
3,000
2,400
1,920
15,000
(3,000)
12,000
15,000
(5,400)
9,600
15,000
(7,320)
7,680
Answer to Example 3
Depreciation = 15, 000 −1, 000 = 2, 800 p
...
5
Y/e 30
...
02
Cash
6/12 × 2,800 = $1,400
Car
Accumulated Depreciation A/C
2002 Dep Exp
2003 Balance
4,200 2003 Dep Exp
Cash
4,200
Balance
2004 Balance
7,000 2004 Dep Exp
7,000
Balance
15,000
Depreciation Expense A/C
2002 Accum Dep
1,400 2002 Inc Stat
...
2,800
2,800
2,800
2004 Accum Dep
2,800 2004 Inc Stat
...
Revaluation A/C
528,000 Accum Dep
588,000
1,116,000
(W1) Dep Exp = 6/12 × 2% × 3,600,000 = $36,000
(W2) Dep Exp = 6/12 ×
3, 072, 000
= $44,522
34
...
a
...
At date of revaluation, the accumulated depreciation is $1,116,000
...
a
...
5 years
...
5 = 34
...
Chapter 7
No Examples
Chapter 8
Answer to Example 1
Statement of Financial Position
Current assets
Receivables (W1)
Less: Allowance for receivables (W2)
Statement of Profit or Loss
Expenses
Irrecoverable debts (2,500 + 1,600)
Increase in allowance for receivables
$
58,400
(5,024)
53,376
4,100
5,024
9,124
(W1) Receivables: 62,500 – 2,500 – 1,600 = $58,400
(W2) Allowance for receivables:
Specific:
2,800
2,224
General: (4% × (58,400 – 2,800)
5,024
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1,080,000
36,000
1,116,000
1,116,000
1,116,000
44,522
1,116,000
1,116,000
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Answer to Example 2
Receivables
82,000 Irrecoverable
Irrecoverable
Balance
82,000
74,000
Balance
Balance
Irrecoverable Debts Expense
5,000
3,000 Inc Stat
12,560
20,560
Receivables
Receivables
Allowance a/c
Allowance for Receivables
Irrecoverable
5,000
3,000
74,000
82,000
12,560
Allowance for Receivables
3,312 Balance
12,560
20,560
20,560
Calculation for allowance for receivables
Specific: (8,000 + 2,000)
10,000
2,560
General: (4% × (74,000 – 10,000)
12,560
Answer to Example 3
Receivables
Cash
Balance
Balance
Sales
Balance
Irrecoverable
99,200
87,200
Balance
Receivables
Receivables
74,000
261,000
335,000
97,000
2,200
Irrecoverable
Irrecoverable
Balance
Irrecoverable Debts Expense
8,000 Receivables
4,000 Allowance
Inc Stat
12,000
238,000
97,000
335,000
8,000
4,000
87,200
99,200
Irrecov
...
50 =
700
14/11 Sale
20/11 Purchase
500
200
400
8,600
× $12
...
43 =
× $15 =
600
28/11 Sale
100
500
8, 600
)
700
12
...
43
(
8, 058
)
600
14
...
47 =
Average cost
2,458
5,600
8,058
600
21/11 Sale
Total cost
3,600
5,000
$7,235
Chapter 10
Answer to Example 1
Cash Receipts Book
Description
Pattie
Chairs
Ann
Pattie
Total
6,000
1,200
1,000
4,000
12,200
Capital
6,000
4,000
10,000
Sales
1,200
1,200
Receivables
1,000
1,000
Cash Payments Book
Description
Chairs
Van
Rent
Chris
Wages
Pattie
Total
1,600
2,500
300
900
400
700
6,400
Purchases
1,600
1,600
Van
2,500
2,500
Rent
300
300
Payables
900
900
Wages
Drawings
400
400
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700
700
181
182
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Payables Journal
Supplier
Chris
Chris
William
William
Bertha
Amount
400
800
600
1,000
1,600
4,400
Receivables Journal
Customer
Ann
Edwina
Andrew
Tony
George
Amount
2,100
350
700
1,350
2,100
6,600
Payables Ledger
Chris
900 PJ
PJ
300
1,200
Balance
Balance
1,200
300
Bertha
PJ
CPB
1,600
400
800
Balance
William
PJ
PJ
1,600
1,600
Balance
List of balances
Chris
William
Bertha
300
1,600
1,600
3,500
Receivables Ledger
RJ
Ann
2,100 CRB
2,100
Balance
RJ
Andrew
700
RJ
1,000
RJ
Edwina
350
1,100
2,100
George
2,100
RJ
Tony
1,350
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600
1,000
1,600
1,600
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
List of balances
Ann
Edwina
Andrew
Tony
George
1,100
350
700
1,350
2,100
5,600
Nominal Ledger
CRB
Balance
Balance
CPB
PJ
Balance
Cash
12,200 CPB
12,200
5,800
Balance
Sales
CRB
RJ
7,800
7,800
Balance
Purchases
1,600
4,400
Balance
6,000
6,000
Rent
CPB
300
Capital
CRB
6,400
10,000
Receivables
6,600 CRB
1,000
5,800
12,200
1,200
6,600
7,800
7,800
RJ
Balance
Balance
6,600
5,600
CPB
Van
2,500
CPB
Balance
Payables
900 PJ
3,500
6,000
6,000
4,400
Wages
400
CPB
Trial Balance
Cash
Capital
Sales
Receivables
Purchases
Van
Rent
Payables
Wages
Drawings
DR
5,800
5,600
6,000
2,500
300
400
700
21,300
5,600
6,600
CPB
Drawings
700
CR
10,000
7,800
3,500
21,300
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4,400
4,400
3,500
183
184
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
Chapter 11
Answer to Example 1
DR
Purchases 2,500
CR Payables
2,500
being the purchase of goods on credit
Chapter 12
Answer to Example 1
Gross selling price
= 150 + (16% × 150)
= 150 + 24 = $174
Answer to Example 2
If net selling price
then
120
= x,
= x + (0
...
45
=
1
...
175 × x)
= 1
...
23
1
...
25 × x) = 1
...
25
Answer to Example 2
(a)
(b)
Cost of goods sold = 120,000 – (20% × 120,000) = $96,000
45,000 = x – 0
...
75x
45, 000
Sales: x =
= $60,000
0
...
We must reduce the inventory by this amount, and must also reduce S’s retained earnings (because it is S who sold
the goods and will have taken credit for the profit in its own accounts)
...
Chapter 24
Answer to Example 1
Consolidated Statement of Profit or Loss
Revenue (52,000 + 24,000)
76,000
Cost of sales (12,000 + 10,000)
22,000
Gross Profit
54,000
Expenses (8,000 + 4,000)
12,000
Profit before taxation
42,000
Income tax (12,000 + 3,000)
15,000
Profit for the year
27,000
Profit attributable to:
Owners of the parent (bal
...
figure)
40,800
Non-controlling interest (40% x 8,000)
3,200
44,000
Note: movement on retained earnings
Retained earnings brought forward
(120,000 + ( 60% x (17,000 – 8,000)) )
125,400
Group profit for the year
40,800
Retained earnings carried forward
166,200
Answer to Example 3
Consolidated Statement of Profit or Loss
Revenue (120,000 + 110,000 – 28,000 (W1))
202,000
Cost of sales (55,000 + 50,000 – 28,000 (W1) + 2,000 (W2))
Gross Profit
79,000
123,000
Expenses (9,000 + 10,000)
19,000
Profit before taxation
104,000
Income tax (20,000 + 14,000)
34,000
Profit for the year
70,000
Profit attributable to:
Owners of the parent (bal
...
(Note: although we need to do this so as to show only sales and purchases from outside the group, this adjustment will not affect the total profit
...
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193
194
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to examples
W2 - Unrealised profit:
One quarter of the inter-entity sales remain in inventory and therefore the unrealised profit is ¼ x $8,000 =
$2,000
...
Chapter 25
No Examples
Chapter 26
Answer to Example 1
2010
2009
Net profit margin
1, 896
(
)
17, 232
11%
8
...
5%
Return on capital
(
1, 896
)
6, 455
29
...
6%
Asset turnover
(
17, 232
)
6, 455
2
...
02
Return on equity
(
1,147
)
5, 255
21
...
0%
Current ratio
(
5, 553
)
2, 316
2
...
4
Quick ratio (or acid test)
(
3,139
)
2, 316
1
...
15
Inventory days
(
2, 414
×365)
12, 924
68
...
5 days
Receivables days
(
2, 275
×365)
17, 232
48
...
5 days
Payables days
(
2, 316
× 365)
12, 924
65
...
0 days
Gearing ratio
(
1, 200
)
6, 455
18
...
2%
Leverage
(
5, 255
)
6, 455
81
...
8%
Interest cover
(
1, 896
)
120
15
...
9
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June 2015 Examinations
ACCA F3 / FIA FFA
Free lectures are available on opentuition
...
0)+ 898
...
80+ 840
...
0)
A
3/4 × 25,920 + 1/4 × 28,800 = 26,640; prepayment 3/4 × 28,800 = 21,600
D
2,003,040 + 323,040 – 11,520 + 20,880 – 346,560 = 1,988,880
28,800 + (28,800 × 2%) + (21,600 × 8/12) + 9,600 = 53,376
(201,600 × 2/12) + (230,400 × 10/12) = 225,600; 230,400 × 2/12 = 38,400
Answers to test in chapter 5
1
2
B
A
Answers to test in chapter 6
1
2
3
4
D
A
A
B
(240,000 × 20%) + (6/12 × 160,000 × 20%) – (9/12 × 60,000 × 20%) = 55,000
1/1/00 cost $70,000
Depreciation charge =
195
70,000 – 7,000
7
= 9,000
⇒ NBV after two years 31/12/01 = 52,000
Useful life revised to three years
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$
68,800
1,154,880
44,160
1,267,920
196
June 2015 Examinations
ACCA F3 / FIA FFA
Answers to Multiple Choice Tests
52,000 – 7,000
3
⇒ NBV 31/12/03 = 52,000 - 30,000 = $22,000
⇒ Depreciation charge =
Proceeds
Less NBV
Profit
= $15,000
30,000
(22,000)
8,000
Answers to test in chapter 7
No tests
Answers to test in chapter 8
1
2
B
B
88,800 + ((1,240,800 – 88,800) × 5%) – 93,600 = 52,800
Irrecoverable debts
Decrease in allowance for receivables
(5,376 – 2% × 173,760)
$
2,040
(1900
...
20
3
C
4
$
Balance per trial balance
50,000
Less irrecoverable debt written off
(2,500)
Add irrecoverable debt recovered
1,800
49,300
B
838,000 – 72,000 = 766,000; allowance 60,000
Answers to test in chapter 9
1
2
3
4
B
D
A
C
(300@230) + (500@220) + (50@190) = 188,500
Answers to test in chapter 10
1
2
3
B
B
A
Answers to test in chapter 11
No tests
Answers to test in chapter 12
1
D
List Price
Trade discount
Sales tax (17
...
Amortisation
c/d
$
20
95
155
B
Tangibles
b/d
...
2
B
X
90% share of Y
3
44,600
90% x 19,500
17,550
62
...
profits
(70% x 17,000)
11,900
76,900
Answers to test in chapter 24
No tests
Answers to test in chapter 25
No tests
Answers to test in chapter 26
1
2
3
4
5
C
1080/7200 x 100% = 15%
A
2376/7200 x 100% = 33%
D
624/7200 x 365 = 32 days
B
(300 + 624 + 1608) / 1890 = 1
...
18
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Title: Financial Accounting
Description: A note that produced by opentuition.com Introduction to Accounting. The Statement of Financial Position and Statement of Profit or Loss. Double Entry Bookkeeping
Description: A note that produced by opentuition.com Introduction to Accounting. The Statement of Financial Position and Statement of Profit or Loss. Double Entry Bookkeeping